Mortgage News: Housing Initiatives Promoted

A top official at the Federal Reserve called for more aggressive action to help the housing market by allowing more homeowners to refinance and by converting some foreclosures into rental housing.

Home sales have been disappointing this year, with tight credit and weak demand making it harder for markets to absorb a steady stream of foreclosed properties.
"Clearly the market is not functioning as it should," said Federal Reserve Governor Elizabeth Duke in a speech Thursday in Washington.


Though mortgage rates are hovering near the lowest levels in decades and the Fed pledged last month to keep interest rates close to zero for another two years, many Americans haven't been able to refinance their home loans because they don't have enough equity or they can't qualify under rigid standards.


Ms. Duke said that policy makers should consider enhancing an existing White House program designed to facilitate more refinancing of loans guaranteed by government-supported mortgage firms Fannie Mae and Freddie Mac. Allowing more homeowners to take advantage of low interest rates to reduce their monthly payments could both lower the risk of future defaults and boost the weak U.S. economic recovery.


The White House is working on similar proposals, but they need either the cooperation of Congress or the Federal Housing Finance Agency, which regulates Fannie and Freddie and has been more skeptical of loan-assistance programs that have big upfront costs for the two.
Some bondholders have been critical of the idea of spurring a new round of refinancing, arguing it would be unfair to them because they stand to lose billions if performing loans are refinanced at lower rates. Critics also say that such intervention could also create uncertainty that would raise rates for future homeowners.


Ms. Duke dismissed those concerns by pointing to her previous banking career experience. "When I bought mortgage securities…I always knew they were subject to refinancing," she said.
Over the last two years, however, mortgage bonds have traded with an assumption that fewer borrowers would refinance because they face more hurdles. "I don't view changing that dynamic as being harmful to the markets," she said.


Average rates on 30-year fixed-rate mortgages stood at 4.22% for the week ending Thursday, according to a survey by Freddie Mac. That is near the lowest level in more than 50 years.
The current White House program, known as the Home Affordable Refinance Program, or HARP, was launched in 2009 and has helped about 838,000 borrowers with Fannie- or Freddie-backed loans through June. But fewer than 63,000 borrowers that are significantly underwater—owing more on the mortgage than the property is worth—have been able to take advantage, even though millions of borrowers with loans backed by the loan giants are underwater.


Mortgage refinancing has been muted because riskier borrowers face higher fees charged by Fannie and Freddie that banks pass on in the form of a higher rate. Ms. Duke also said that banks have been reluctant to refinance riskier borrowers under HARP because they could be forced to buy back the loan if it defaults later.


"Given the potential savings to households, the relatively low take-up on this program warrants another look at the frictions that may be impeding these refinancing transactions," she said.
Ms. Duke also endorsed an effort, being studied by regulators and administration officials, to convert foreclosed properties into rental housing.


Banks are taking back and re-selling a greater number of homes through foreclosure, pressuring prices in hard-hit markets.


Accounting rules have often led Fannie, Freddie, and banks to sell repossessed homes shortly after taking them through foreclosure, and bulk sales remain rare. Ms. Duke said that housing-market conditions were "unusual enough" to justify a different approach by banking regulators to treating how banks account for foreclosed homes held on their books.
By NICK TIMIRAOS And ALAN ZIBEL

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