The administration has been working for weeks on how to implement a home loan relief program. President Barack Obama could include a nod to the plan inside a speech on job creation next week, sources familiar with the administration's programs said.
The refinancing initiative would allow certain borrowers to refinance loans which are backed by government-owned Fannie Mae and Freddie Mac or the Federal Real estate Administration, the sources said.
A broad-based effort to automatically refinance millions of mortgages isn't in the works, yet the administration is looking to take targeted changes to an existing program that would allow more borrowers to make the most of low mortgage rates, including allowing borrowers to refinance even if they owe a substantial amount above their property's current value.
The idea is to help struggling borrowers refinance at current low interest, which would cut their monthly payments and free up cash for additional spending. The hope is that this could drum up overall business exercise.
The average rate on a 30-year fixed loan was 4. 22% a week ago, close to the lowest level in more than 50 years, according in order to Freddie Mac.
Fannie Mae, Freddie Mac and the FHA, which together take into account 90% of the US residential mortgage market, would be given permission to start refinancing plans for borrowers that are current on their mortgage payments and never considered seriously delinquent, according to the sources.
While the administration is pressurized to firm up the details, it is not yet clear whether borrowers seeking to get a loan that is more than 80% of the value of the house would qualify for refinancing. The White House has kept the specifics of the refinancing plan closely guarded as it attempts to sort out the details.
White House officials had long been wary of trying aggressive new programs to bring back the housing market. The prevailing view at the White House over high of the last two years was that any remedies would cause at least as numerous problems as they solved.
A mainstay of the administration's housing initiative, folded out in April 2009, has fallen short of expectations. Known as the house Affordable Refinance Program, it was originally intended to help 4 million in order to 5 million homeowners avoid foreclosure. As of May it had helped no more than 810, 000 homeowners refinance into loans with lower rates, according to the actual Federal Housing Finance Agency.
But Democrats close to the White House said the weakness throughout the economy and the drop in mortgage rates have led officials to take another look at ideas that could bolster the housing market and ease any risk of strain on household budgets.
Analysts who favor action say housing is at one's heart of the economy's woes and that its moribund state is creating a risk of the Japanese-style "lost decade" of economic stagnation.
"We can either spend the better a part of a decade allowing households to gradually work off their debt burden, inch said William Galston, a scholar at the Brookings Institution think tank. "Option number two is that people try to jump-start the process. "
"I think it's time to return to the drawing board, " he added.
CHICKEN OR THE EGG
Some economists, nevertheless, believe the strain the housing market is putting on the rest from the economy can be addressed in other ways, such as using infrastructure spending and tax credits to encourage hiring to be able to reinvigorate growth.
Christina Romer, a former top economic adviser to Obama, said that when compared with other measures to address the economy's woes, a housing-specific program could be costly. She noted that homeowners tend to be wealthier than the general population so such programs wouldn't be targeted to people most in need.
"A bold jobs program may be just as effective and better targeted to those who need help probably the most. Also, healing the economy is as likely to heal the housing marketplace as programs aimed directly at housing, " said Romer, a professor in the University of California, Berkeley.
And while refinancing has accounted for the most of mortgage applications for many months now, according to weekly data from the actual Mortgage Bankers Association, there is no evidence that the refinancings are supplying a spur to consumer spending.
The refinancing initiative under consideration by the Federal government mirrors a plan contained in legislation co-authored by Senator Barbara Boxer, the California Democrat, and Senator Johnny Isakson, a Republican from Georgia.
In the letter on Monday to Edward DeMarco, acting head of the Federal Real estate Finance Agency, which regulates Fannie Mae and Freddie Mac, Boxer argued how the plan would provide a "dual benefit. "
She said it would assist Fannie and Freddie avoid losses, since fewer borrowers would fall delinquent, while providing a lift to the economy.
BONDHOLDERS ON THE LOSING END
The loudest objections are now being registered by holders of mortgage bonds, who would take a hit if loans are repaid early.
Some fund managers have loaded up on agency mortgage-backed securities, individuals bonds backed by mortgages guaranteed by Fannie Mae, Freddie Mac and the federal government National Mortgage Association, because they offer higher yields than US Treasuries.
A week ago, the $5. 4 trillion agency MBS market recorded one of its worst weeks inside a year as traders dumped mortgage bonds out of concern the White House would submit a plan that would shoulder them with losses.
While mortgage rates happen to be hovering around record low levels, banks remain stingy with lending although they're sitting on more than $1 trillion in excess reserves. Homeowners without a job or good credit histories have been essentially shut from the refinancing process.
Some investors say the economic benefit of a government-encouraged refinancing wave will be minimal.
"It's a political hail Mary. It's unclear why they want to throw a monkey wrench right into a $5 trillion market, " said John Kerschner, head of securitized products from Janus Capital Group in Denver. He said the net benefits for the actual economy are negligible, perhaps adding $20 billion to $30 billion "at best" towards the US economy.