WASHINGTON (Reuters) - A top Federal Reserve official on Thursday signaled the central bank's support for an evolving Obama administration plan to retool homeowner aid programs, saying it could give a helpful lift to the economy.
The administration has been working for weeks on ways to improve its mortgage relief programs. The new initiative would allow certain borrowers to refinance loans that are backed by government-owned Fannie Mae and Freddie Mac or the Federal Housing Administration, according to sources.
Speaking at a housing forum sponsored by the central bank, Fed Governor Elizabeth Duke emphasized that changes are needed to revive the housing market. While she suggested a number of changes to the Obama administration's current housing relief initiatives, some of her ideas included reexamining government programs that help provide refinancing options for struggling homeowners. Such initiatives are already under consideration by the Obama administration, according to sources.
Duke said an estimated four million borrowers were eligible for the Home Affordable Refinance Program (HARP) -- rolled out by the White House in 2009 to prevent foreclosures -- but only about 800,000 had refinanced through the program. HARP, which aims to help those whose loans are worth more than their homes, has fallen below expectations.
"Given the potential savings to households, the relatively low take-up on this program warrants another look at the frictions that might be impeding these refinancing transactions," she said.
Duke, who is known for holding consensus views at the U.S. central bank, said that among problem areas in HARP were upfront fees for refinancing imposed by lenders that add thousands of dollars to costs and discourage borrowers from even trying to use it.
Other problems include lien holders who impede the process by refusing to allow their loans to be subordinated to a new refinance loan, as well as mortgage insurers who refuse to underwrite policies when a loan is refinanced.
SIGNAL OF FED SUPPORT
The Obama administration is considering unveiling plans next week to address some of these issues, sources familiar with the administration's deliberations have told Reuters.
The goal is to help struggling borrowers refinance at current low interest rates, which would cut monthly payments and free up cash for other spending, hopefully drumming up overall business activity.
The average rate on a 30-year fixed loan was 4.22 percent this week, close to the lowest level in more than 50 years, according to Freddie Mac.
Fed Chairman Ben Bernanke said on Friday that "good, proactive" housing policies could help stabilize the housing market and foster a recovery. Together, Bernanke and Duke's remarks indicate the central bank supports the administration's efforts to rework the HARP program.
Duke said reworking current refinancing programs would not cause severe losses for mortgage bondholders, nor would it be "harmful to the markets."
"There has been a lot of discussion about refinancing and there had gotten to be in the market a pricing of these frictions into these mortgage-backed securities," she said in response to a question from the audience.
Bondholders worry they could face losses if the loans underlying the bonds they hold are paid off early.
While a broad effort to automatically refinance millions of mortgages is not in the works, the administration is looking to make targeted changes to existing programs, including HARP.
The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, would have to sign off on the new White House plan. The agency's acting director, Edward DeMarco, has sought to limit the costs the two firms impose on to taxpayers, and the administration must surmount any lingering concerns he might have that a more-aggressive financing plans could shoulder Fannie and Freddie with losses.
RENT FORECLOSED PROPERTIES
Duke also suggested some of the foreclosed homes now held by government-sponsored enterprises like Fannie Mae and Freddie Mac be converted into rental units -- noting that rental markets are now sounder than the market for new homes.
The Treasury Department has already asked hedge funds, private-equity groups and institutional investors for ideas on buying and converting foreclosed homes into rentals.
Duke offered her own idea, saying that what may be required to make conversions feasible would be some type of structure to permit sales of pools of foreclosed properties grouped by geographic location.
But she noted the government would have to be careful to ensure it was not simply "replacing the blight of a foreclosed home with the blight of a rundown rental property" that would leave communities worse off.
Duke said problems in the housing sector now were so widespread that it can no longer be considered just an issue for so-called subprime markets but instead has become one that overarches the question of how to stimulate growth and jobs.
"Regardless of how we got here, we, as a nation, currently have a housing market that is so severely out of balance that it is hampering our economic recovery," she said, a sentiment also expressed by private-sector economists who point to trouble in housing markets as a key drag on expansion.
(Additional reporting by Glenn Somerville; Editing by Andrew Hay)