The Fed's twist will help, but it won't be enough to turn around the troubled U.S. housing sector.
Ditto for Washington's other plans to help homeowners.
The Federal Reserve surprised investors Wednesday when it said it would help keep mortgage interest rates low by reinvesting proceeds from past purchases of housing debt into government-backed mortgage securities. The program is part of the Fed's latest easing initiative, which investors dubbed "Operation Twist," after a similar program in the 1960s.
Frustrations are growing in Washington that efforts to revive housing have failed in the face of high unemployment and rampant foreclosures that have ravaged home prices.
"They are trying to do anything they can to pump up the housing market," said Bert Ely, a banking consultant and chief executive officer of the firm Ely & Co., in Alexandria, Virginia. "This may have some slight positive impact at the margin, but it's not salvation."
Investors in mortgage bonds have worried about talks between the White House and federal housing regulators to try to spur refinancing efforts.
The Obama administration is considering two proposals: increasing refinancing options for troubled borrowers, and clearing the overhang of foreclosed properties on the market by renting out the large stock of repossessed homes.
After more than three years of trying to remedy one of the root causes of the U.S. recession and the slow economic recovery, the administration has largely exhausted efforts involving tax credits, mortgage modification programs, government-backed loans and other tools intended to keep home values up and help delinquent borrowers avoid foreclosure.
The prevailing view of the White House economic team has been that any aggressive remedies would cause at least as many problems as they solved.
"Housing finance is in some ways the trickiest policy challenge we face on the domestic front today, given the complexities, the number of industries involved, and the degree of importance...to the economy," James Parrott, senior adviser at the White House's National Economic Council, told the North Carolina Bankers Association at a conference this week.
A HARP IS NOT A HOME
The government's mainstay effort to stabilize housing for the past two years, the Home Affordable Refinance Program (HARP), is under the microscope as federal housing regulators search for ways to expand its reach.
HARP allows borrowers who have loans backed by Fannie Mae and Freddie Mac , and who hold little or no equity, to refinance to take advantage of low interest rates.
The program, rolled out in April 2009, has modified about 838,000 mortgages -- although it was originally intended to help 5 million homeowners avoid foreclosure.
"The administration has not been sufficiently aggressive," said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, which receives funds from a major residential development company.
"I don't think there's any panacea, but at minimum, they should streamline HARP and make it more effective for those borrowers that are making payments on time."
Mortgage rates are at record lows, yet many U.S. homeowners have been unable to refinance because they owe more than their homes are worth or have less-than-perfect credit.
The current average for a 30-year fixed loan is 4.09 percent, the lowest since the early 1970s when Freddie Mac began tracking them.
The housing sector faces a small hurdle at the end of September when the size of the loans that Fannie and Freddie, as well as the Federal Housing Administration, can purchase are set to fall back to pre-financial crisis levels.
The so-called conforming loan-limit caps are set to decline from $729,500 in the highest-priced real estate markets to $625,500 on Oct. 1.
Karen Petrou, managing partner of Federal Financial Analytics Inc., in Washington, said the administration's best hope to support housing would be to ramp up the refinancing initiative .
"If there was an easy way out of this, then a solution would be done," Petrou said. "The refinance proposal is the remaining cannon in the arsenal."
RENTALS TO THE RESCUE?
Still, many borrowers cannot keep up with loan payments and record numbers of people are defaulting. Default notices on U.S. home loans posted their biggest monthly increase in four years in August, according to the data firm RealtyTrac, showing that lenders are starting to speed up the foreclosure process.
Government-run Fannie Mae, Freddie Mac and the Federal Housing Administration own about 250,000 foreclosed properties. With that inventory predicted to grow, they are examining ways to rent out the repossessed homes. The aim is to shrink the stock of government-owned homes to help stabilize prices.
"That effort is more about putting a bottom on the foreclosure issue," Petrou said.
"Unless you're ready to deal with those that are delinquent and not foreclosed, even those that are current but struggling, then I don't think you will see a recovery." (Reporting by Margaret Chadbourn; Editing by Jan Paschal)
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