Mortgage plan offers chance to cut defaults, juice economy

Almost six years into the worst housing crisis since the Great Depression, home prices continue to fall and foreclosures show little sign of abating. More than 20% of homeowners remain “underwater” on their mortgages, owing more than their homes are worth. The economy won’t fully heal until housing gets better, Federal Reserve Chairman Ben Bernanke reminded Congress last week.

Yet no one has figured how to fix the mess. The Obama administration and several states have been working on a multibillion dollar settlement with banks that

Let more owners refinance at low rates

abused the foreclosure process; the deal would provide some help to some people in danger of losing their homes, but not enough to make a big difference. Buying up all the underwater mortgages in America might do the job, but that would cost billions of dollars the nation doesn’t have and aid millions of people who never should have bought their homes in the first place. Government shouldn’t use taxpayer money to reward people who made bad investments.

So does this mean policymakers should give up and do nothing more than wait for the market to bottom out? Not when today’s historically low interest rates offer an opportunity for millions of responsible homeowners to reduce their monthly payments, which would have the dual benefit of reducing defaults and boosting the economy.

The catch, of course, is that many of those homeowners have too little equity in their homes to be able to refinance — and save an average of $ 250 a month— under current rules.

To deal with this problem, the Obama administration rolled out a refinancing plan last fall that targeted homeowners who have kept up with their mortgage payments even though they are underwater. That plan was limited to homeowners with mortgages backed by Fannie Mae and Freddie Mac, and Obama was able to implement it without congressional approval.

Now the administration has proposed expanding the program to 3.5 million homeowners with mortgages owned or backed by banks, hedge funds and other institutions outside the government. To make that work, the Federal Housing Administration would change its refinancing guidelines so it could guarantee those new mortgages for homeowners current on their mortgage payments, which would open the way for private lenders to refinance.

The $ 5 billion to $ 10 billion cost— essentially loan reserves to cover the risk to the FHA— would come from a fee on the largest banks and financial institutions. Most of these institutions got government assistance during the financial crisis, and most would presumably stand to make money from this new refinancing market.

It’s a reasonable proposal, but one that requires congressional approval, making it a non- starter in its current form because of Republican opposition.

Republicans’ key criticism is that Obama’s other housing efforts haven’t worked, so why would this one be any different? True, only about 900,000 homeowners have taken advantage of administration initiatives to refinance their mortgages and stay in their homes, out of 11 million who were potentially eligible. But that’s still a significant reduction in foreclosures, which blight neighborhoods and drive down property values.

Congressional Republicans no doubt sense an election- year trap, that their desire to limit the government’s credit exposure will be portrayed as heartlessness toward struggling homeowners and affection toward big banks. To avoid that perception, the challenge for the opponents is to come up with an alternative that goes beyond simply saying no.