Obama administration ramps up mortgage refinancing effort

The Obama administration, worried that the housing crisis is strangling the economic recovery, is stepping up efforts to aid the battered market as another wave of home foreclosures threatens to drive values down further and rattle consumer confidence again.

But the administration’s piecemeal approach — giving temporary reprieves to the jobless, converting empty homes into rental properties, allowing more people to refinance mortgages — isn’t going to help much, said industry leaders and even some lawmakers in the president’s own party.

What’s needed, they said, is a grand plan, such as an across-the-board reduction of the principal homeowners are carrying on their mortgages.

“Abysmally too little is being done to deal with the problem,” said Rep. Dennis Cardoza (D-Atwater), who recently led a contingent of California lawmakers in denouncing the administration’s handling of the crisis.

He said 70% of the homeowners in his district are underwater on their mortgages, meaning they owe more than their homes are worth. And a map of San Joaquin County in his office shows clusters of red where constituents have lost their homes to foreclosures.


To counter such criticism, the White House hopes to announce changes to its main refinancing program within days to make it easier for more homeowners — perhaps millions more — to participate. Agency officials are looking at reducing fees, streamlining processes and raising the the loan-to-home value ratio cap, which is now at 125%, to be eligible for refinancing.

The administration hopes that the “amped up” effort, as one aide to President Obama put it, will help turn the tide. But aides and congressional staff members acknowledged that the economic and political problems afflicting housing recovery efforts remain daunting.

The government doesn’t have the money to rescue every troubled homeowner, lenders are reluctant to take on more risk or add to their mortgage losses and sharp ideological divisions — whether a major stimulus is needed, for instance, or any money should be spent — are hamstringing the kind of quick, large-scale action that some critics want.

Even today’s historically low interest rates aren’t helping.

Underwater borrowers can’t qualify for new loans or refinancings even if they are current on payments. And many would-be buyers are sitting on their hands, spooked by the high numbers of foreclosures and vast tracts of vacant homes.

In the meantime, banks are stepping up efforts to foreclose on borrowers in default. In the three months that ended Sept. 30, notices of default, the first formal step in the foreclosure process, jumped nearly 26% from the previous quarter, according to DataQuick, a San Diego real estate information service.

Additionally, a likely national settlement over complaints about banks filing faulty paperwork to take back homes should clear the way for an additional 400,000 foreclosures in coming months, according to Moody’s Analytics, an economics research firm.

Moody’s predicts that foreclosures will rise next year to a record 1.5 million, or a hefty 30% of all sales of previously owned homes.

The new crush of distressed properties will further dampen home values, especially in hard-hit Florida, California and Nevada, inflicting more damage on the broader economy and job growth.

Amid rising concerns, White House officials are intent on easing the rules of the Home Affordable Refinance Program, which allows mortgages backed by financing giants Fannie Mae and Freddie Mac to be refinanced at lower rates.

HARP, begun in 2009, was supposed to help millions of homeowners, but instead just 865,000 loans have been refinanced through July.

Economists and housing industry executives said the program’s stringent requirements made many homeowners ineligible. For example, borrowers can’t qualify if their mortgages exceed 125% of their homes’ value. Those who do qualify might face stiff fees.

Banks, meanwhile, have been reluctant to participate, partly because they feared they might be required to buy back mortgages if even small violations of government underwriting guidelines occurred.

Obama can’t make changes in HARP. That’s the realm of the Federal Housing Finance Agency, an independent agency that took control of Fannie and Freddie in 2008.

Acting Director Edward J. DeMarco has been reluctant to make changes for fear that they could result in more losses for taxpayers. The takeover of Fannie and Freddie already has cost $169 billion.

Democratic lawmakers have urged Obama to exert stronger pressure on DeMarco, but Treasury Secretary Timothy F. Geithner acknowledged at a congressional hearing this month that the administration’s hands are tied because it is up to DeMarco’s agency to lay out specific steps. Housing agency officials wouldn’t comment when asked about White House pressure.

Fannie and Freddie own or back 30 million mortgages, and, according to Federal Reserve estimates, about 4 million might be eligible for refinancing under a revamped program. But most experts say the effect would be much more modest, with only 2 million more loans reworked. About 15 million loans are underwater.

“Putting aside issues of political practicality, the idea holds some appeal,” forecasting firm Macroeconomic Advisers said in a research report. “However, we doubt that it would give a quick and major boost to overall consumer spending.”

And even with changes, the program won’t do anything for the 3.5 million homeowners who are at least 120 days late on their payments or in default.

The administration is working on another plan that could convert a large number of vacant homes to rental properties. The effort, floated by Fed officials and people in the housing industry, could reduce the number of empty houses that are blighting communities.

With demand for rental housing relatively strong, small investors have been buying foreclosures and other homes to turn them into rentals. But Fed Gov. Elizabeth Duke said at a recent forum that large-scale conversions haven’t happened because it’s expensive to manage single-family home rentals and that the standard practice for the government and the industry has been to prepare vacant properties for sale to new homeowners.

Duke suggested that the government help facilitate the bundling of a large number of rental properties so as to make it more attractive to investors. Community activists, however, worry that turning many owner-occupied homes to rentals will only hurt neighborhoods in the long run.

Administration officials wouldn’t comment on specific ideas or give a timetable for the initiative. But economists say it will be at least a year from now before such a program would begin to show meaningful results.

A far more ambitious proposal is offered by Martin Feldstein, a Harvard professor and top economic advisor to President Reagan: Reduce the principal on the mortgages so that the loans are no more than 110% of the value of the properties.

Banks would absorb half the cost of the principal reduction, and the government the rest. Feldstein figures the losses could amount to $350 billion.

But Feldstein acknowledged there’s political resistance to helping some homeowners while leaving others with smaller loans to fend for themselves. Feldstein’s solution would be to allow the government to go after homeowners’ assets if they default on the new, smaller loan.

“Banks will be careful going forward,” he said, “not to make loans that are at risk of creating very high [mortgage-to-home value] ratios.”

But Feldstein’s plan has little chance in Congress, which is averse to passing anything resembling stimulus legislation. And lenders, too, don’t like the idea of lowering debt for many borrowers who they said can afford to pay or for those who are gaming the system.

“People look at foreclosure as a morality play, not as a broad economic one,” said Elyse Cherry, chief executive of Boston Community Capital, a nonprofit financial institution that is working with lenders to avert foreclosures.

Still, attitudes might change, given that housing is increasingly being seen as the biggest weight on the sluggish economy.

“Prices continue to spiral down,” Cherry said. “Nobody knows what the bottom is.”