In an address last week Fed Chairman Ben Bernanke stated the obvious: That until the wave of home foreclosures in the US can be stemmed the US economy will continue to stall. Here are some quotes from an AP article on the subject:
Lenders appear to be on track to initiate 2.25 million foreclosures this year, up from an average annual pace of less than 1 million during the pre-crisis period, he said.
Bernanke mentioned four possible solutions (all of which require tax-payer supported funding).
1. Fix the broken Hope For Homeowners (H4H) program. This program, approved over the summer and launched October 1 of this year has been an absolute flop so far. It is voluntary on the part of banks and banks have no incentive to participate right now. Here is a quote on that:
Bernanke suggested Congress lower the lender’s upfront insurance premium as well as reducing the interest rate borrowers pay, which presently is quite high, roughly 8 percent. To bring down this interest rate, Treasury could buy Ginnie Mae securities, which fund the mortgage program, or Congress could decide to subsidize the rate.
1a. Or this variation on the H4H theme was also floated:
Yet another option would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the “Hope for Homeowners” or another government program that insures home mortgages.
2. The FDIC-style subsidized loan modification plan. This approach is designed to give the banks incentive to modify terms on loans to keep at-rick families in the homes:
The FDIC put this plan into effect at IndyMac Bank, a large savings and loan that failed earlier this year, and has used it to modify mortgages at other financial institutions.
Under the so-called IndyMac plan, struggling home borrowers pay interest rates of about 3 percent for five years. Rates are reduced so that borrowers aren’t paying more than 38 percent of their pretax income on housing. Bernanke suggested this threshold could be lowered to perhaps 31 percent of income, with the government sharing some of the cost.
We also get this from the article:
The Fed chief’s remarks come as the Treasury Department weighs new plans to revive the moribund housing market.
Under one plan backed by the financial industry, Treasury would seek to lower the rate on a 30-year mortgages to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac. It’s unclear exactly how much the plan would cost. It is possible that Paulson will ask Congress for the second $350 billion installment of the $700 billion financial bailout package to bankroll the effort.
But while lower interest rates are great for people who can qualify for a loan, they don’t help people facing foreclosure:
“Getting mortgage rates down is … positive, but it doesn’t help people that currently have unaffordable mortgages because it doesn’t help them refinance,” said FDIC chief Sheila Bair. “Low interest rates help some consumers, but the ones that really need help and can’t refinance are not helped.”
It is pretty clear that President-elect Obama is committed to preventing more foreclosures so expect at least some of the ideas being floated to be put into action in the coming months.