Fixing economy requires more work on housing

Only 2 percent of President Obama's speech to Congress on Sept. 8 dealt with the plight of underwater homeowners, but those 72 words could do as much or more for the flagging U.S. economy as the entire $447 billion jobs bill.

Especially if the White House is willing to think big.

That's a big if, given that the alphabet soup of housing assistance programs to date -- HAMP, HARP, EHLP, 2MP -- have been too poorly administered and too limited in scope and eligibility to slow or halt the slide in the U.S. housing market.

On Wednesday, the mortgage data firm CoreLogic reported that the number of people who owed more than their homes were worth slipped slightly at the end of the second quarter, to 10.88 million. Good news, until the company revealed the reason for the decline: An uptick in foreclosures.

In other words, the number of underwater homeowners fell because some of them finally drowned.

So skepticism that yet another White House program will be any more successful is justified. More than a week after Obama's speech, lenders and housing and consumer advocates still don't know even the most basic outlines of the program.

But the trial balloons that began floating late in the summer suggest it could be as simple as allowing just about anyone who is current on their house payments to refinance into mortgage rates that are at or near 40-year lows, no matter how underwater they might be; or as ambitious and complicated as having lenders write down their loans enough for borrowers to get their heads above water.

Last week, the average rate on a 30-year loan was under 4 percent. According to CoreLogic, almost three-fourths of underwater homeowners are paying more than 5.1 percent on their mortgage, and many are paying more than 6 percent.

On a 30-year, $200,000 loan the difference between 6 percent and 4 percent is $245 a month.

Imagine the impact of an extra $3,000 a year. Maybe it means being able to make purchases that a homeowner has been putting off because they feel so house poor. Maybe it means being less likely to walk away from making payments on a house that is worth 30 percent less than it was five years ago.

"Making payments on a house that has lost value would be much more palatable at lower interest rates," said Julie Gugin, executive director of the Minnesota Home Ownership Center.

The current government-backed refinance program, which was projected to help up to 5 million borrowers, has been used by fewer than 900,000 because it excludes anyone with a first mortgage that exceeds 125 percent of their home's value.

Persuading lenders to agree to write down the value of some of their loans would be much tougher to pull off. In many cases the burden would fall most heavily on the lender holding a second mortgage or home equity line of credit, which banks typically carry on their own books.

Last week, the U.S. secretary of housing and urban development, Shaun Donovan, said it was time for lenders to recognize "that those loans are never going to be worth what they were originally made for. And, frankly, they have a much better chance of recovering on a portion of those loans if they can put that homeowner in a place where they can afford to stay in their home and afford their payments."

An industry trade group, the Financial Services Roundtable, did not respond to questions about how second mortgages might be treated in such a program.

Still, the government couldn't force lenders to write down their loans, so it would have to provide incentives. One could be an equity sharing arrangement that allows lenders to share in any future gains from a sale or refinancing.

The benefits of loan writedowns would be more widely felt than a broader refinancing program.

Whatever the White House cooks up, it will need the full cooperation and participation of Fannie Mae and Freddie Mac, the already ailing government-controlled housing finance giants that taxpayers bailed out three years ago. The companies' top regulator has said he's talking with the White House about how a new program might work, but so far he hasn't pledged to participate.

Some argue that homeowners should take their medicine instead of counting on the government to bail them out.

The problem with that argument is that, so far, policymakers have been too ready to mitigate the risks lenders have taken in recent years. When credit markets froze three years ago and banks suddenly found themselves stuck with loans nobody else wanted, the Federal Reserve of New York stepped in and bought up $1 trillion worth of them.

Meanwhile, between 2008 and the end of 2010, nearly 4 million U.S. homes have been foreclosed on, some improperly and others illegally. That has helped pull down real estate values across the country, even for people who've continued to make mortgage payments.

Homeowners have been taking their medicine for years. Unfortunately, everyone has gotten sicker.