State of the Union 2013: A step forward on housing?

Nestled early into President Obama’s State of the Union speech last night was a short bit about how the housing market and housing lenders have become a little too cautious.

After a housing disaster driven by unscrupulous lenders who handed handing out loans all too freely, the industry needed to reform its ways.

But according to the president and many economists, they've gone too far in the other direction, with only those with impeccable credit granted loans or refinancing. And now that the housing market is making steady gains (driven largely by investors who can pay cash), it’s time to loosen things up a bit for ordinary families who are ready to buy.

“Home prices are rising at the fastest pace in six years, home purchases are up nearly 50 percent, and construction is expanding again,” Mr. Obama said Tuesday night. “But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected.  Too many families who have never missed a payment and want to refinance are being told no. That’s holding our entire economy back, and we need to fix it.” 

The question is: Can the market right itself or should the government step in?

Slowly, lenders are loosening their credit standards. But the pace is far too slow, according to some economists.

“After a period when cheap mortgages were too available, the pendulum has swung too far; a lack of finance is holding the economy back,” former Treasury Secretary Larry Summers wrote in a Financial Times column last Sunday. “The clearest evidence is the growing number of lower- and middle-income families paying rents to the private-equity firms that own their homes at rates far above what a mortgage would cost.”

Obama’s solution: a bill that would extend refinancing to homeowners with privately financed underwater loans. (Homeowners with government-backed loans already have refinancing opportunities, thanks to executive action taken last year.) He introduced the proposal back in September, and mentioned it again last night:

“Right now, there’s a bill in this Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today’s rates.… Right now, overlapping regulations keep responsible young families from buying their first home. What’s holding us back?  Let’s streamline the process, and help our economy grow.”

He’s been down this road before. According to a paper released last week by Amherst Moirtgage Insight, “President Obama sketched out a refinancing program in his State of the Union address in early 2012. He urged Congress to allow homeowners whose loans are not backed by Government Sponsored Enterprises (GSEs) to refinance, through a new FHA  [Federal Housing Administration] program, and proposed paying for the plan with a new fee on large financial institutions.”

The proposal lost steam, and a number of bills and proposals concerning both private and government-backed refinancing have languished in Congress since. But Obama’s patience may be wearing thin. According to the Washington Post, the president is weighing taking executive action on housing instead of going through Congress.

“The plan, if adopted, would likely be aimed at homeowners who have otherwise kept up with their mortgage payments but have been unable to refinance because the loan against their home exceeds its depressed value,” the Post reports. “Many Republicans in Congress have balked at the idea amid concerns over the cost to taxpayers.”

Of course, political intervention can have unintended consequences.

Early in the housing bubble Congress also pressured the GSEs – Fannie Mae and Freddie Mac – to loosen their credit standards so that more low-income people would qualify for loans and buy homes. That pressure helped boost the number of subprime borrowers, who in turn became fodder for Wall Street's machinations, which ended in the bursting of the housing bubble.