Bernstein: How Obama can revive housing without Congress

We’ve asked experts to weigh in on President Obama’s new housing plan this week, and Jared Bernstein just sent along his thoughts. He notes that the Fed’s low-interest rates can help home owners, but only if some of the barriers to accessing them are lifted. Bernstein also flags at least one thing that Obama can do without Congress.
(Reuters)

Jared Bernstein, former adviser to Vice-President Biden and senior fellow at the Center for Budget and Policy Priorities

“There are a number of ways in which I think the President’s new housing ideas are smart and well timed. Clearly, most policy in this space has underwhelmed, so let’s see where this goes, but here are the aspects of the plans that we think are potentially most helpful.

First, it’s important to recognize the linkages between what the President is proposing and the Federal Reserve’s monetary policy. When the economy stumbles — and ours did more than stumble — the Fed provides an exit ramp from recession by lowering the rate of borrowing, and these bleed into mortgage rates, which are now, in fact, historically low.

However, in the aftermath of the housing bubble, that exit ramp is blocked by supply overhang, lender risk aversion and underwater borrowers who can’t access the lower rates. One way to view these plans is that by making it easier for home owners to refinance, the barriers to the low-interest-rate exit ramp are lowered.

It’s true, as many have said, that the way the White House proposed to pay for the refinance plan is a non-starter with Congress. But I guarantee you they’ll happily take a different one if Congress serves it up.

Given that Congress may well not do that, the part of this plan that in my view has the most potential to move the needle — this part doesn’t require Congressional approval — is the [Home Affordable Modification Program] revamp. First, the White House figured out a way to allow Fannie and Freddie do principal reductions through HAMP, something that was previously not allowed. Second, they’ve significantly kicked up the incentives by tripling the cents on the dollar that they’ll pay lenders to do the write-downs.

Since research shows that reducing principal is one of the surest ways to avoid foreclosure, this one has real potential to move the needle.but only if Fan and Fred get it together and play along.”