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Fed drive to lower mortgage rates may fall short

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The Federal Reserve’s latest push to revive the economy this week had a key aim: Drive low mortgage rates even lower to strengthen the ailing housing market and help cash-strapped borrowers get out from under higher-interest loans.

But that attempt to throw a lifeline to struggling homeowners faces a stark reality: Despite historically low interest rates, the very people most in need of the kind of relief that could come from refinancing their homes have found it difficult to qualify.

Even as the Fed undertook new measures, a study released by the central bank this week found that tight lending standards and the continuing drop in home prices prevented 2.3 million homeowners from refinancing last year. A combination of high unemployment, stricter lending requirements enacted after the financial crisis and the sheer number of borrowers who owe more than their homes are worth continues to thwart many Americans from taking advantage of rock-bottom rates.

“There’s a huge roadblock in place right now. Folks cannot refinance in the current marketplace,” David Berenbaum, chief program officer at the National Community Reinvestment Coalition, a collection of community-based organizations that promotes equal access to credit. “It’s very disheartening.”

Analysts agree that allowing more homeowners to benefit from low rates could free up tens of billions of dollars in credit, potentially giving the economy a much-needed shot in the arm. Finding a fair and politically viable way to accomplish that goal, however, is proving difficult.

Without policymakers undertaking new fiscal policies aimed at helping troubled homeowners — and helping would-be buyers get access to loans so they can purchase the glut of homes on the market — the Fed’s push to keep rates low is unlikely to accomplish much.

“The fact of the matter is the administration and Congress have to take a much more straightforward and candid look at what’s happening in real estate finance,” Berenbaum said. “[Otherwise] it’s going to continue to slow and drag down the economy.”

Given the current political environment, in which lawmakers have shown little propensity for compromise and where the focus has remained on cuts to the federal budget, congressional approval for new programs or additional spending seems unlikely.

Still, in his recent address to Congress to introduce a $447 billion jobs package, President Obama vowed to “work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent.” The administration has redoubled its efforts of late on housing, exploring a range of options to help revive the battered mortgage market.

Part of that has been a push by the White House to help borrowers lock in the low rates that the Fed has sought to maintain and to make their payments more affordable. The administration’s Home Affordable Refinance Program currently covers mortgages that were originated prior to June 2009 and backed by government-sponsored mortgage giants Fannie Mae and Freddie Mac. To be eligible, borrowers must be current on their mortgage payments, and their loan must not exceed 125 percent of the value of the home.

At the end of June, 838,000 borrowers had refinanced through the HARP program, a significant number but well below initial expectations. The administration has sought to broaden the pool of homeowners who can qualify for the program, but any changes require the blessing of the independent Federal Housing Finance Agency, which oversees Fannie and Freddie.

Expanding the existing refinancing program could require Fannie and Freddie to drop certain fees or shoulder losses on the existing loans that are getting paid off. FHFA, which is charged with protecting the interests of Fannie and Freddie under its role as conservator, has been skeptical of any measures that could cost the companies more money and increase the burden for taxpayers.

Even so, FHFA has previously modified the program and said earlier this month that it “is carefully reviewing the mechanics of HARP” to find ways that might “reduce barriers” and allow more homeowners to take advantage of it.

It’s a delicate balance.

Loosening the eligibility strings might help a portion of homeowners refinance, stave off foreclosures and give a jolt to the housing market, but it also creates potential problems. A recent Congressional Budget Office report estimated that a large-scale refinancing program would provide affected borrowers an average of $2,600 in the first year. But it noted that Fannie and Freddie, the Treasury Department and other investors in mortgage-backed securities would suffer losses as the existing loans got paid off early.

“If you get a lot of people refinancing, there are winners and losers,” said Ted Gayer, co-director of the Economic Studies program at the Brookings Institution. “It’s going to be a good thing for borrowers,” he added, but not necessarily for investors.

Ultimately, Gayer said, the Fed’s attempt this week to force interest rates lower might prove beneficial. But unless elected officials step in to complement the Fed’s actions, it won’t be enough to put the housing market back on solid footing.

“This is not a major bullet,” he said. “It’s going to help some borrowers on the margins, but it won’t be the panacea to the housing market problems we face.”

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