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Politics prevents bold move on U.S. housing crisis

U.S. President Barack Obama is overhauling a program to encourage homeowners to refinance at lower interest rates.

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There's no shortage of fresh reading material on the failure of the Obama administration's efforts to revive the housing market today.

Paying customers can read a long story in the Wall Street Journal and Larry Summers's opinion on the subject in the Financial Times. The Washington Post also has a long read on the subject here that is free to all with an internet connection.

The sudden rush of words on housing policy reflect the deep frustration with the relative timidity with which Washington has approached what some economists consider the central barrier to a strong recovery, given the government's apparent willingness spend tens of billions on tax cuts and infrastructure.

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The argument for a more aggressive housing policy is that consumer confidence and spending is weak because millions of Americans are holding mortgages worth more the value of their homes. There are calls for the government to finance a massive purchase of foreclosed homes to remove the glut from the market and put upward pressure on prices. Those homes would then be converted to rental units or destroyed, whatever it takes to rebalance supply and demand.

President Barack Obama is overhauling a program to encourage homeowners to refinance at lower interest rates. (The news release and background are at Federal Housing Finance Agency's website.)

The goal is to get more Americans who are paying mortgages at rates of seven and eight per cent into the current record-low rates that are close to four per cent. The Home Affordable Refinance Program -- available to homeowners who are "underwater," or own more on their mortgage than their home is worth -- has helped about a million people lower their monthly debt payments, a figure that U.S. Department of Housing and Urban Development Secretary Shaun Donovan acknowledged on a conference call Monday was well short of the administration's original expectations and well short of the scale needed to make an economic impact.

Still, the administration is resisting scrapping the program, betting that modifications will do.

Now, everyone who is current on their mortgage payments on loans backed by Fannie Mae and Freddie Mac is eligible, unlike previously, when the government refused to consider applicants with mortgages that were 25 per cent greater than the value of their homes.

The Obama administration also is eliminating some fees to make refinancing more affordable, and is taking steps to reduce the uncertainty for banks that might be willing to take over existing loans. The most important of these steps is the waiving of certain representations and warranties attached to current Fannie and Freddie loans. Gene Sperling, who is Mr. Obama's top economic adviser in the White House, said this provision should dramatically enhance competition in the refinancing market.

Mr. Obama's changes address many of the criticisms of the original refinance program, but won't satisfy those who contend that far bolder initiatives are needed.

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Reading between the lines of the White House conference call, it seems clear Mr. Obama has decided this is one case where voters won't reward the bold.

From the beginning, the biggest barrier to doing something for the many millions of homeowners drowning from the financial crisis is the many more millions who found ways to stay afloat.

At least three times during their call with reporters, Messrs. Donovan and Sperling emphasized that the changes the president was making were targeted at homeowners who "have done all the right things" and have "met their obligations."

There are a plethora of plans from economists that would more effectively and quickly solve the U.S. housing crisis.

However, heading into an election year, the White House has little incentive to risk a backlash from a large majority of homeowners who are making their payments and might resent the idea of their tax dollars being used to bail out a neighbour who they assume simply took on more house than she could afford.

That might be the right political call. But as a result, housing will continue to be a drag on the U.S. economy in 2013.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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