President Obama has just taken the wraps off his new plan to help the housing market, which will make it easier for "underwater" homeowners to refinance their mortgages.
Until now, the government has refused to refinance houses that had greater than 125% "loan-to-value" ratio, meaning houses for which the loans are much bigger than the underlying value of the houses.
Now, the Federal Housing Finance Authority (FHFA) is eliminating the 125% loan-to-value ceiling, which will allow homeowners who are deeply underwater to refinance federally guaranteed mortgages at lower rates. This will make it easy for the homeowners to make their payments, and, in turn, give them more money to spend on other things. Theoretically, anyway, it will also make the homeowners less likely to default, because their payments will become more affordable.
So far, the government's attempts to ease the pain the housing market have been disappointing. The original "HARP"--Home Assistance Refinance Program--has only helped about 900,000 homeowners refinance, versus the 3-4 million that were expected. So everyone should probably keep expectations in check for the new modification, as well.
Professor James Galbraith of the University of Texas says there are things the government can do to help the housing market work through its problems, but this particular measure falls far short of them. Professor Galbraith advocates giving homeowners the right to rent properties they formerly owned, which would force the banks to take losses on the original mortgages and then become landlords.
Given the political climate, Professor Galbraith does not think the government will launch any programs that will significantly improve the housing market. He thinks, instead, that the cure will be time. Over-indebted consumers will have to continue to gradually work their way out of their problems, and that process will take many more years.
For a more optimistic view of the housing market, check out this presentation, which argues that the market is about to turn...
- Federal Housing Finance Authority