There have been some positive signs for the housing market lately, with many saying that real estate has finally hit bottom. The end of relentlessly falling real estate prices will have a positive effect on the economy by encouraging banks to lend more freely and by making consumers more confident about their financial situation.
Despite this positive development, the housing market is far from booming, and perhaps the most important factor holding it back is that some 8 million homeowners are still underwater — that is, they owe more on their mortgages than their houses are worth. And these homeowners — especially those whose mortgages aren’t owned by Fannie Mae or Freddie Mac — have been unable to refinance their loans because banks won’t renegotiate mortages that are underwater. So there’s a huge chunk of the population that is locked into high-interest rate mortgages for no good reason.
If we were able to offer underwater homeowners who are current on their mortgages the same rates at which other homeowners are able to borrow, this would provide much needed relief to struggling homeowners. As an added bonus, it would give a jolt to the economy by putting more money in homeowner pockets each month or letting them build up equity in their homes at a faster rate.
On Wednesday, Oregon Senator Jeff Merkley released a plan that would do just that. His “Rebuilding American Homeownership“ proposal would set up a trust located in either the Federal Housing Administration, the Federal Home Loan Banks, or the Federal Reserve, which would buy underwater mortgages on which borrowers are current, and refinance those mortgages into either :
- A 15-year 4% mortgage that would keep a homeowner’s monthly payment somewhat stable, but allow them to rebuild equity quickly;
- A 30-year 5% mortgage that would offer a homeowner significantly smaller monthly paymets; or
- A “two-part” mortgage consisting of one mortgage worth 95% of the home’s current value and a second mortgage worth the remainder of the balance. The second part of the mortgage would not require payments or accrue interest for five years, and would therefore further reduce monthly payments for a borrower.
The beauty of a plan like this lies in the federal government’s extremely low cost of borrowing. Because a federal trust like the one proposed would be able to borrow at rock-bottom rates, it could lend at 4% and still leave plenty of margin to soak up possible losses. Indeed with such healthy margins, the program would likely net a profit for taxpayers.
So does a plan like this have a chance of being implemented? The White House has been pushing a similar plan since early this year, but a gridlocked Congress has made any chance of new legislation remote. But Senator Merkley is stressing that no new legislation would be needed to at least launch a pilot program modeled after his proposal. He argues that leftover money from the less-than-successful HAMP program and FHA Short Refinance Program could be made “available to the ten states that provide the best grant applications for RAH pilot programs.” The proposal continues:
“Current law prohibits establishing new programs funded by the money allocated to the HAMP and Short Refi programs. However, there are many common elements between these programs and the RAH program, which could facilitate the funding of RAH pilot programs as a modification of the current programs.”
At a hearing yesterday before the Senate Banking Committee, Treasury Secretary Tim Geithner expressed support for the plan. According to a report in Housing Wire, the Secretary was less committal as far as his department’s ability to use existing funds from programs aimed at helping homeowners. Said Geithner, “I think the policy is very good . . . we would like to work with you on it. The question is do we have legal authority and resources on it to launch pilots?”
If it can be done without Congressional action, launching a pilot for this program seems like a no-brainer. We’ve spent hundereds of billions bailing out banks, but have yet to find a successful way to help millions of responsible homeowners who got caught in the bursting of the housing bubble. This program would likely not cost taxpayers a dime. And if a pilot program is successful, a full-blown implementation might even get support from the right.
There is an understandable distaste among Republicans and many other Americans for further government intervention in private enterprise. But the American housing finance industry is already nearly half-controlled by the federal government. Whether we like it or not, Washington will be playing a big role in housing finance for years to come as we attempt to wind down our interest in Fannie Mae and Freddie Mac. So if we have an opportunity to provide aid to responsible homeowners at no extra cost, what’s there to lose?