When Federal Reserve Chairman Ben S. Bernanke spoke recently of headwinds facing the U.S. economy, the top item on his list was housing.
“Previous recoveries have often been associated with a vigorous rebound in housing, as rising incomes and confidence and, often, a decline in mortgage interest rates led to sharp increases in the demand for homes,” Bernanke told the Economic Club of New York in late October. “But the housing bubble and its aftermath have made this episode quite different.”
The bursting of the housing bubble and near-collapse of the mortgage market is still reverberating across the economy — and across government efforts to enact more than rough patches to the housing industry in the wake of the 2008 financial crisis and the worst recession since the 1930s.
For the housing sector, the damage was crushing: Home prices and construction jobs decreased by almost one-third, and 4 million homes went into foreclosure as a result of the meltdown. After slow going over the past five years, however, the green shoots of a housing recovery are more visible. Home prices rose by 3.6 percent over the past year, the biggest jump in two years, and homebuilders have reported growing confidence for seven consecutive months.
Still, the housing recovery — and with it, the broader economy — faces a heavy drag, in part because many people are unable to refinance their mortgages and take advantage of historically low interest rates. Government efforts to spur more refinancing have been as halting as the country’s economic growth. Bernanke estimates that roughly 20 percent of existing borrowers owe more on their mortgages than their homes are worth, which makes it extremely difficult to refinance.
President Barack Obama has pushed to allow more homeowners to refinance their mortgages, and some Senate Democrats are hoping related legislation will see action before the lame-duck session is out. But GOP opposition combined with a crowded legislative calendar make enactment in this session doubtful, leaving backers of more aggressive action on refinancing looking for other routes to repair a damaged business and, some believe, free up what could be many millions of dollars in homeowner wealth.
Economists of all stripes, and even Obama himself, have been disappointed in the results of the administration’s housing policies.
The Home Affordable Refinance Program, launched in 2009, was intended to help 4 million to 5 million Americans refinance their mortgages. According to the latest administration figures, however, only just over 1.6 million refinances have taken place through the program.
The White House has pushed the Federal Housing Finance Agency, which regulates government-backed mortgage giants Fannie Mae and Freddie Mac and has immense power over the mortgage market, to encourage more mortgage modifications in an effort to help struggling homeowners avoid foreclosure.
But Edward J. DeMarco, a holdover from the George W. Bush administration who leads the agency, has shrugged off some of the administration’s proposals, arguing that they would add costs and more risk to taxpayers. The mortgage giants have received more than $180 billion in public funds since they were seized by the federal government in September 2008 at the height of the crisis.
In October 2011, however, the agency expanded the Home Affordable Refinance Program to allow borrowers with loans held by Fannie and Freddie to refinance even if they are underwater on their mortgages.
The change has boosted refinancing, but many Democrats want further action. In his 2012 State of the Union address, Obama called on Congress to pass new legislation to let underwater home-owners refinance, even if their loans are not backed by the federally controlled mortgage giants. “While government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief,” Obama said. “No more red tape. No more runaround from the banks.”
In part thanks to Bernanke’s Fed policies, interest rates have stayed in the cellar — the average 30-year fixed-rate mortgage hit an all-time low of 3.34 percent in November — but millions of Americans are locked into mortgage payments at higher rates.
Obama’s plan would let these people refinance and, he said, put an extra $3,000 per year into homeowners’ pockets. He proposed paying for the program with a fee on the largest financial institutions, giving “those banks that were rescued by taxpayers a chance to repay a deficit of trust.”
The proposal received a frosty response from GOP lawmakers. House Financial Services Chairman Spencer Bachus, R-Ala., said the program was “not a serious plan to help the nation’s housing market.”
Obama also hopes to include mortgage relief in a fiscal cliff deal. He included his mortgage refinance program for underwater borrowers in a proposal on the fiscal cliff tax and spending issues last week, according to a GOP aide familiar with the White House offer.
Senate Democrats have taken up the cause, but with little progress to show for it.
Sen. Robert Menendez of New Jersey and Sen. Barbara Boxer of California introduced new mortgage refinancing legislation in May. Their bill was more modest in that it would only target loans backed by Fannie and Freddie. It was also designed to help those borrowers who are not underwater but still face barriers from lenders that discourage refinancing. For example, the bill would eliminate appraisal fees when borrowers refinance and would prohibit Fannie and Freddie from charging risk-based fees for refinancing loans they already guarantee.
To win support from deficit-minded lawmakers, the sponsors could boast that the bill pays for itself through reduced default rates on government-backed loans. But the measure has fallen victim to partisan gridlock, with Republicans anxious to bring in their own plans on housing policies and Democrats wary of tough votes on the future of Fannie and Freddie.
In September, Boxer and Menendez slightly modified their bill to address some industry and GOP concerns. The move won the endorsement of the powerful Mortgage Bankers Association, but Republicans didn’t bite, leaving no clear path toward a vote in the lame-duck session.
Still, efforts to encourage more mortgage refinancing will not go away, particularly when interest rates remain so low and lawmakers are eager to assist the economy.
Senate Democrats could always reprise their efforts next year, or regulators could take administrative actions without waiting for Congress. DeMarco, for instance, could enact the changes sought by Menendez and Boxer with his authority over Fannie and Freddie.
If DeMarco doesn’t embrace these and other policies sought by the Obama administration, the president may seek to replace him. Republicans have already blocked one nominee to lead the housing finance agency, but Obama would seem likely to try anew in his second term. And if Obama is stymied by GOP senators again, there is always the route of a controversial recess appointment.