UPDATE: Fed's Duke Calls For Effort To Help Struggling Borrowers Refinance
Last update: 9/1/2011 12:59:10 PM
--Fed's Duke highlights benefit of refinancing mortgages, renting foreclosures
--Obama admin, Fed officials studying more ways to aid troubled borrowers
--Fed's Duke: Changing refinancing policies would boost economy
(Adds details throughout from speech and question-answer session)
By Alan Zibel
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The U.S. government should help more homeowners refinance their mortgages, a top Federal Reserve official suggested Thursday, speaking as Obama administration and Fed officials evaluate ways to boost the flagging U.S. housing market.
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 have not been able to refinance their home loans.
Many economists say allowing more borrowers to do so would put more cash in Americans' pockets and provide a boost to the broader economy. Federal Reserve Governor Elizabeth Duke said in a speech in Washington that making the refinancing process easier for some risky borrowers who are having trouble refinancing their loans would aid the U.S. economy.
"Removal of barriers to refinancing would boost the impetus to recovery provided by lower long-term interest rates," she said. "Thus, finding different approaches to the policies that are hindering refinancing would likely provide some support to the economic recovery while improving the circumstances of homeowners."
While the Obama administration officials are studying several of these barriers, they need the cooperation of the federal regulator for mortgage finance companies Fannie Mae (FMCC) and Freddie Mac (FMCC) to implement any new efforts. That regulator, the Federal Housing Finance Agency, has been skeptical about many loan-assistance programs.
The housing market, Duke said, "is not functioning as it should. Despite near-record-low interest rates, credit conditions remain tight for many consumers and investors interested in buying or refinancing residential real estate."
The average rate on a 30-year fixed loan was 4.22% this week, according to Freddie Mac, just above the lowest level in more than 50 years.
Many homeowners who owe more on their properties than their homes are worth have been unable to take advantage of those low rates, due to extra charges and tighter criteria that make it difficult for those borrowers to refinance. Duke also noted that some banks also are reluctant to refinance riskier borrowers because they could be forced to buy back the mortgage if it later defaults.
Duke also cited two more obstacles: holders of second mortgages such as home equity loans who resist refinanced loans and the reluctance of private mortgage insurers to re-underwrite policies.
She highlighted the potential benefits to the economy.
"To the extent that more widespread refinancing reduces the overall volume of distressed mortgages, it likely reduces pressures on house prices which would, in turn, lead to lower losses on sales of foreclosed properties across all mortgage portfolios," she said.
Answering a question from the audience, Duke said there's no single approach that will fix the housing market's woes. "I think it's going to take a number of things, all of which will help and that complement each other in a strategic sense," she said.
Obama administration officials are unlikely to launch a sweeping effort to automatically refinance millions of home loans, according to industry analysts. But they have been studying other possibilities, including targeted changes to an existing refinance program in order to allow more borrowers to take advantage of low mortgage rates.
That program, known as the Home Affordable Refinance Program was launched in 2009 and has helped about 838,000 borrowers through June. However, Duke noted that roughly 4 million homeowners appear to meet eligibility requirements for the program.
"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.
Other steps that administration officials could take include having Fannie and Freddie eliminate or reduce charges they assess banks when riskier borrowers take out loans. Another would be to allow homeowners to refinance even if they owe more than 25% above of their property's current value on their primary mortgage.
Duke also endorsed an effort, being studied by regulators and administration officials, to convert foreclosed properties into rental housing.
"The weak demand in the owner-occupied housing market and the relatively high demand in the rental housing market suggest that transitioning some [foreclosures] to rental housing might benefit both markets," she said.
-By Alan Zibel, Dow Jones Newswires; 202-862-9263; alan.zibel@dowjones.com
(END) Dow Jones Newswires
September 01, 2011 12:59 ET (16:59 GMT)
