With the housing sector threatening to tip the economy towards another recession, the Obama Administration is looking for ways to assist struggling homeowners.
Just how bad is the housing market? In July home foreclosures reached 212,764. And according to some estimates 11.1 million mortgages are underwater. This means that more than 23% of US homeowners owe their banks more than the underlying properties are worth. Many of them will end in foreclosure.
To remedy this bleak picture the White House is considering proposals for another housing assistance program this one aimed at refinancing mortgages. Writing in Marketwatch Greg Robb (Plan to kick-start housing wins Jackson Hole Nod) contends that Glenn Hubbard, a former top economic adviser to President George W. Bush and now dean of the business school at Columbia University, has presented the most concrete proposal to the White House. With mortgage rates low, his plan would allow any homeowner who is current on a government-backed mortgage to refinance even if the home’s value was less than the current mortgage amount. With 75% of GSE borrowers holding a 30-year fixed-rate mortgage of 5% or more, this could significantly lower homeowners monthly payments. The hope: it would prevent them from falling behind in their payments and enable them to spend more. Hubbard claims his plan “would help up to 37 million borrowers and act as a long-lasting tax cut that would add $70 billion per year to spending.”
Of course, it’s not a great plan for bondholders who would get lower returns. And the 11.1 million who are behind in payments won’t be eligible.
Whether or not this plan becomes a reality remains to be seen. But interestingly it has won support from many economists attending the Federal Reserve’s Jackson Hole policy retreat. That could be because the options of boosting the economy are becoming extremely slim.
Let us know your thoughts on this latest proposed housing assistance program. Do you think it would actually get to the root of the problems facing the housing market?
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