Hoskins Analyst in
Matthew Kurlanzik Research Associate
bursting of the housing bubble in 2006 precipitated the December 2007 - June
2009 recession and a financial panic in September 2008. With the housing
market seen as a locus for many of the economic problems that emerged,
some Members of Congress propose intervening in the housing market as a
means of improving not only the housing market itself but also the financial
sector and the broader economy. Critics are concerned that further
intervention could prolong the housing slump, delay recovery, and affect
outcomes based on the government’s preferences. Three frequently discussed
proposals for the housing market are (1) reducing mortgage principal for
borrowers who owe more than their homes are worth, (2) refinancing mortgages
for borrowers shut out of traditional financing methods, and (3) renting
out foreclosed homes.
Principal reductions have the potential to improve the housing market by
minimizing disruptive defaults and foreclosures. However, by shifting the
debt burden from the borrower to the lender, principal reduction may
negatively impact financial institutions that would have their investments’
principal balances reduced. Principal reduction, nonetheless, might improve the broader
economy if it stimulates consumer spending, diverting income from debt
repayment to spending on other goods and services.
Legislation introduced in the 112th Congress to reduce mortgage principal
includes H.R. 1587, H.R. 3841, H.R. 4058, and S. 2093. Principal reduction
is also part of the settlement reached between several mortgage servicers
and 49 state attorneys general and the federal government.
Large-scale refinancing helps borrowers who are current on mortgage payments to
refinance into a new mortgage with a lower interest rate. Because
refinancing generally helps borrowers who are current, it is unlikely to
have a major effect on the housing market, but it may prevent some foreclosures
that could occur in the absence of a refinance. In addition, refinancing has
the potential to have a larger effect on the economy by stimulating
consumer spending. A mortgage refinance could lower a borrower’s monthly
payment, freeing up more income for non-housingrelated spending. Some of
the additional spending of borrowers may come at the cost of the financial
sector. Although some financial institutions may lose investment income from refinancing,
others could benefit from the increased business associated with refinancing.
President Obama, in his 2012 State of the Union address, proposed streamlining
the existing program to refinance Fannie Mae and Freddie Mac loans and
establishing a new mass refinancing plan for non-Fannie Mae and
non-Freddie Mac loans. Congressional proposals for large-scale refinancing
of Fannie Mae and Freddie Mac loans include H.R. 363 and S. 170.
Renting out foreclosed homes currently held by banks and other financial
institutions has the potential to stabilize housing prices by reducing the
supply of homes on the “for sale” market. However, this policy depends on
house prices increasing in the future such that, when the rented properties
are eventually sold, they are sold in a healthier market. Unlike principal
reductions and mass refinancing, renting foreclosed homes does not reduce
existing homeowners’ payments or increase their disposable income. Any
impact on consumer spending is likely to be indirect through stabilizing
house prices and preserving neighboring homeowners’ equity.
The Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and
Freddie Mac, has started a pilot project to convert foreclosed homes into
rentals. Congressional proposals to expand the renting of foreclosed
properties include H.R. 1548, H.R. 2636, and S. 2080.
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