President Barack Obama is escalating the fight over how to revive the housing market, a sector of the economy that has dragged down growth for six years running, eroded consumer confidence and wiped out $7 trillion in American wealth.
Opponents said the president’s plan, announced yesterday, was as much about politics as the policy goal of easing access to refinancing for homeowners with negative equity. It helps the White House frame differences with Republican presidential candidates and with Congress, which for two straight years has rejected a bank tax that he said would be used to finance the program.
“This housing crisis struck right at the heart of what it means to be middle class in America: our homes,” Obama said in a speech in the Washington suburb of Falls Church, Virginia. “We need to do everything in our power to repair the damage and make responsible families whole.”
Paul J. Miller, a bank analyst at FBR Capital Markets in Arlington, Virginia, said that while it doesn’t “have a prayer in hell of passing,” the proposal may help Obama score political points. A bank tax is “bad public policy, but it’s populism at its highest,” he said.
Even if it passes Congress, the program might be too small to accelerate the recovery. “It’s not necessarily a game changer for the economy,” said Mahesh Swaminathan, a fixed-income analyst with Credit Suisse in New York.
Government-backed mortgage bonds had almost no reaction to Obama’s announcement. Fannie Mae and Ginnie Mae securities, which would be damaged by homeowners refinancing into lower-cost loans, gained, according to data compiled by Bloomberg.
Rates for 30-year U.S. mortgages declined to the lowest level on record after Obama’s announcement. The average rate for a 30-year fixed loan fell to 3.87 percent, the lowest in records dating to 1971, from 3.98 percent in the week ended today, Freddie Mac, the McLean, Virginia-based mortgage-finance company, said in a statement.
The housing slump that began in 2006 was a catalyst for the worst U.S. recession since the Great Depression and a persistent obstacle to a rapid recovery. Slow growth and joblessness still at 8.5 percent has kept economic issues atop voters’ concerns as the presidential election approaches.
The Obama administration already has tried to bolster the housing market with initiatives from loan modification programs to temporary tax credits for home purchases.
Obama used the unveiling of his latest plan to sharpen the contrast with his opponents, echoing language from the leading Republican candidate, Mitt Romney.
The former Massachusetts governor told the Las Vegas Review-Journal in an interview published Oct. 17 that the housing market should “run its course and hit the bottom.”
Obama said yesterday, “it is wrong for anyone to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit bottom.”
The plan likely will hit a roadblock in the Republican-controlled House, where Speaker John Boehner dismissed it as a continuation of failed policies.
“None of these programs have worked, and I don’t know why anyone would think that this next idea is going to work,” the Ohio Republican said.
No Sweeping Change
If Obama’s plan was enacted, Swaminathan estimated that about 150,000 borrowers would take advantage, refinancing about $30 billion worth of principal.
“It will benefit those borrowers, but it’s not this sweeping change that some might read into at first blush,” he said. If every borrower saved 2 percentage points on interest, the total savings would top out at $600 million, he said.
Residential real estate values have dropped 33 percent from their July 2006 peak and have left about 11 million households owing more on their homes than the properties are worth. Earlier this month, the Federal Reserve Board called the housing market “depressed.”
The housing slump “has kept the economy from gaining steam,” Celia Chen, housing economist at Moody’s Analytics in West Chester, Pennsylvania, said in an interview. “Builders see that there’s no demand for housing because there’s an excess of unsold homes that we’re still working off. The drop in equity has also been a big drag on consumer spending.”
Housing reduced U.S. economic growth by an average of 0.7 percentage point per year between 2006 and 2011 -- six consecutive deductions -- when accounting for the value of home construction along with home prices’ effect on consumer spending, according to Moody’s calculations.
The housing market collapse has resonance in several states that Democratic and Republican strategists have identified as presidential election battlegrounds.
Nevada had the highest portion of homeowners with “underwater” mortgages at 58 percent of all mortgaged properties, followed by Arizona at 47 percent, Florida at 44 percent and Michigan at 35 percent, according to CoreLogic data for the third quarter.
Federal Reserve Chairman Ben S. Bernanke has appealed for more action to revive housing as the U.S. central bank helps to push down interest rates on mortgages. The Fed said in a paper sent to Congress last month that previous administration efforts to make refinancing easier have failed to go far enough.
Home construction and property sales led the way out of the previous seven recessions going back to 1960, according to PMI Group Inc., a mortgage insurer in Walnut Creek, California. New-home sales improved an average of eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery.
For 2010, the first full year of the current recovery, residential investment fell 4.3 percent, according to the Commerce Department. Going back to the Great Depression, it gained an average of 22 percent in the first year of expansion, excluding 1946, when it tripled as soldiers returned from World War II.
The centerpiece of Obama’s new housing initiative would allow borrowers, even those who owe more than their homes are worth, to refinance into loans guaranteed by the Federal Housing Administration.
To pay for the program, Obama said he will ask Congress for a tax on financial companies with more than $50 billion in assets. Congress has refused to act on similar tax proposals.
The streamlined refinancing would make new mortgages less expensive and limit paperwork. Appraisals and tax returns would not be required, according to the White House fact sheet.
The program would be open only to “responsible” homeowners current on their payments and with no more than one delinquency in the previous six months, the document said.
The program increases risks for taxpayers, even if a bank fee raises $10 billion in new FHA funds. If a million borrowers refinance, the default rate would have to be less than 5 percent to be covered by the new funds, Swaminathan said.
“Clearly the taxpayer is going to be on hook for this exposure,” even with funds from the bank fee, he said.
The FHA, created in 1934 with the goal of expanding homeownership for under-served communities, charges lenders and borrowers a fee in exchange for a guarantee that mortgages will be paid. The agency has grown rapidly since the 2008 subprime lending collapse and now insures more than a third of U.S. mortgages. At the same time, the agency’s cash reserves hit a record low of $2.6 billion last year.
Since the 2008 subprime lending collapse, the FHA has paid $37 billion in claims related to defaulted mortgages, according to an independent audit released in November.
In addition to the refinancing plan, Obama laid out actions that the administration will take without congressional approval. One is a Homeowners Bill of Rights, which will make it easier to shop for a loan by simplifying mortgage forms and improving disclosures on costs and fees. The Consumer Financial Protection Bureau last year began work to establish standards.
Obama also is promoting a pilot program to sell foreclosed properties in bulk to investors who maintain the homes as rentals. It will be limited to homes owned by Fannie Mae, the mortgage company under government conservatorship.