President Barack Obama's latest plan to help homeowners struggling to pay their mortgages drew fire as an election year ploy, and even supporters said it was likely to help only at the margins.
The Obama administration on Friday expanded eligibility requirements for its signature foreclosure relief program, increased incentives to lenders to reduce loan balances and extended the life of the program by a year.
It also sought to entice Fannie Mae and Freddie Mac to write down mortgage principal, effectively ratcheting up pressure on their regulator who has blocked them from doing so.
Republican Sen. Bob Corker of Tennessee said he would introduce a bill to ban the use of federal funds to pay for principal reduction, saying he did not want responsible homeowners in states such as his to pay for the irresponsible behavior of buyers in places like California and Florida — two of the states hardest hit by home price declines.
"The idea that federal tax dollars would be used to reduce the principal on some outstanding mortgages and perhaps even bail out investment properties and beach houses is terrible public policy," the Senate Banking Committee member said in a statement.
The health of the housing market is shaping up as hot-button issue ahead of the presidential and congressional elections in November.
Nearly 11 million Americans are underwater on their mortgages, meaning they owe more than their homes are worth. Homeowners have struggled with the loss of $7 trillion in household wealth. Millions more have lost homes to repossession in states that will be up for grabs in 2012.
"I think it's an election year ploy," said Glenn Hubbard, dean of Columbia Business School in New York and a top economic adviser to Republican presidential candidate Mitt Romney. "We will definitely see the housing market continue to drag with foreclosures rising and real risk in house prices."
When the HAMP program was introduced in 2009, the administration projected that as many as 4 million borrowers would see the terms of their loans eased. So far, only about 900,000 have won permanently lower monthly payments — an average reduction of $500 a month — and the program has been attacked by Republicans as inefficient and wasteful.
To date, the Treasury Department has spent only $2.3 billion of the $29 billion set aside for the program. In addition to principal reduction, HAMP encourages mortgage servicers to cut interest, extend terms or defer some debt to reduce monthly payments and keep borrowers in their homes.
Given the uncertain outlook in Congress, especially in an election year, the administration is seeking ways to help the housing market that don't require legislation, said Eric Belsky, managing director of the Joint Center for Housing Studies of Harvard University.
"It is difficult to judge how big of an effect this might have, but you would expect that at the margins it will have an impact," he said.
What may be the most effective part of the administration's plan is also the least certain — the effort to coax Fannie Mae and Freddie Mac to take part in principal reductions by offering them financial incentives.
The two companies, which were seized by the government in 2008, have been kept alive with $169 billion in taxpayer aid. Their regulator, Federal Housing Finance Agency Acting Director Edward DeMarco, has said borrowers could get as much relief through loan forbearance at less cost to taxpayers.
Absent an act of Congress, DeMarco has the final say on whether or not Fannie Mae and Freddie Mac will participate. He has said he is studying the administration's proposal.
"Now that Treasury has said it’s not going to cost Fannie and Freddie anything to do principal writedowns, it seems like it would be hard for DeMarco to resist," said Phillip Swagel, a professor at the University of Maryland who service in the Treasury Department under then-President George W. Bush.
"It's a fiscal gimmick, but they have satisfied his objection."
Swagel, who criticized the proposals as feeling more "symbolic than substantive," said the changes could help a modest number of troubled homeowners, but that the policy would have made more sense in early 2009 when foreclosures were being driven by the weak economy.
"There will be some people helped by the larger HAMP incentives, but it's a modest impact at a high cost — and evidently a higher cost than the administration thought made sense back in 2009 and 2010 before the needs of the president's re-election campaign came to dominate his approach to housing policy," he said.
Many economists, however, contend that a program of principal reduction could prove instrumental in fostering a housing recovery.
Amherst Securities Group, a leading broker dealer specializing in mortgage-backed securities, says principal reduction could prevent 8 million to 10 million distressed property sales. A Deutsch Bank report found borrowers are 1.7 times more likely to re-default again after a loan is modified if the balance is not cut.
Consumer advocates argue that the administration's foreclosure relief effort has been dulled by administrative problems, servicer delays and eligibility requirements that are too restrictive.
Mark Zandi of Moody's says a well-targeted and structured national principal reduction program, while a large and costly step, could help the housing market and reach as many as 600,000 people. Even assuming a re-default rate of 25 percent, this would result in approximately 450,000 sustainable modifications, according to the chief economist for Moody's Analytics.
HAMP has forced the mortgage industry to work on alternatives to prevent foreclosures, such as a short sale where a home is sold off below the amount owed on a loan.
"HAMP is based on a carrot approach to subsidies. The subsidies seem to only have gone so far, they didn't quite pack the punch that was originally expected," said Patricia McCoy, a mortgage expert at the University of Connecticut who served briefly at the Consumer Financial Protection Bureau.
"On the one hand tripling the subsidies is a big deal. On the other hand, it still might not be enough. We'll just have to see," she said.
© 2013 Thomson/Reuters. All rights reserved.