I think even the White House would admit that the changes to their refinancing initiative announced this week aren’t a game-changer for the housing market. I would look at them as more of a stimulus bill than a housing bill. If you’re a delinquent borrower, you get no help from the changes. If you want to reduce the principal on your mortgage, you get no help from the changes. This will not boost the housing market, though it may be worthwhile in adding some minor stimulus (maybe as low as just a few hundred dollars a year in the average case), in exchange for extinguishing rep and warranty claims on the affected loans.
House Democrats don’t find the changes sufficient, but what would help? What can be done now, without the aid of Congress, to cure a troubled housing market? Here are some thoughts:
1) An Actual Mass Refinance Program: Just as FHFA changed its eligibility rules on Fannie and Freddie-backed loans for underwater borrowers, they could extend them for every loan in their portfolio. They could theoretically mandate a reduction in the interest rate down to the market rate, without fees, for every single loan they have. Since they have millions of loans, that would cause a surge in refinancing, a lot of stimulus for the economy, and a hiring spike to deal with all the refinancing and appraisals and all the rest. There are downsides to this – it would be the end of the FHFA lawsuits against 17 banks, because all their loans would get new paper. But at least in this trade-off, there’s a significant benefit. Ed DeMarco has admitted that the recent changes do not constitute a mass refi program. We could actually have one of those.
2) Fannie and Freddie Could Participate in Principal Reduction: If you really want to save homes, you have to deal with negative equity, which is highly correlated to foreclosures. Principal write-downs have been proven the most effective step. There’s an existing Treasury Department program called the Principal Reduction Alternative. Because it’s voluntary, the take-up rate has been pathetic. And the main reason is that Fannie and Freddie have rejected participation. They could be compelled to do so. As Jared Bernstein notes, if it means that the government takes over FHFA and installs someone willing to undertake that, it’s what has to be done.
3) The $50 Billion Kitty. The White House has authorization through TARP of $50 billion for foreclosure mitigation. This was supposed to be used through the incentive payments in HAMP, but so far only $2.4 billion has been spent there. There are other programs that grew out of all this, like the Hardest Hit Fund for the most worse-off states. In all, maybe $13 billion has been spent. That other $37 billion must not be put toward deficit reduction when there’s a foreclosure crisis. It has to be put to use. The Hardest Hit Fund programs are not meeting capacity needs. But more money can be put toward that problem.
4) Mandatory Mediation. One of the most effective strategies for foreclosure mitigation has been mandatory mediation, a drum the Center for American Progress has been beating since 2009. Getting the borrower and the lender in a room together before any foreclosure action is taken actually works in reaching a settlement. Cities like Philadelphia and states like Connecticut have seen excellent results, saving people from foreclosure. If all the HAMP money were put toward mandatory mediation, borrowers would be in a much better place. But mandatory mediation is under attack, probably because it works too well. Florida wants to kill it. There are ways that the Administration can design grants that threaten other funds to the states if the mandatory mediation programs aren’t picked up.
5) The Rule of Law. One reason why many are skeptical of the state AG proposed settlement over foreclosure fraud is that no investigation has been done to determine the level of fraud. The second step of that is that it would force accountability, meaning a much bigger share of the cost would be taken up by the banks. Penalties should actually hurt. Eric Schneiderman appeared on Rachel Maddow’s show last night, and this was part of his message. We cannot have real accountability without an investigation into everything the banks did wrong in the housing market. Instead of pressuring AGs for a weak settlement, the Justice Department could join with Schneiderman and undertake a full investigation that would force the banks to do much more to make it up to homeowners.
There are other ideas, like creating a modern-day HOLC to buy up homes. I don’t expect these ideas to be taken up by the powers that be, but it’s important to show that another world is possible.