President Barack Obama said in his State of the Union speech that he wanted to help struggling homeowners refinance their mortgages. The Republicans who want his job say the government should get out of the way of the housing market.
But as the housing crisis takes center stage in the campaign, a growing number of experts say neither approach is potent enough to cure falling prices, depressed construction and waves of foreclosures.
Increasingly, they advocate something much bolder to provide relief to the 11 million homeowners in the United States who owe more on their mortgages than their houses are worth.
The analysts say the market won't heal unless lenders agree to reduce the balance of these so-called underwater mortgages, not just the interest rate that these homeowners have to pay.
“Principal forgiveness is the bazooka that will sort things out,” says Paul Diggle, a property economist with Capital Economics.
A 30 percent drop in prices has wiped out $7 trillion worth of homeowner equity since 2006. The housing collapse has left families feeling poorer and less willing to spend. A quarter of homeowners owe more than their house is worth.
Underwater homeowners find it nearly impossible to refinance or sell, meaning they can't trade up or move for a job. Home sales are the slowest on record. Almost 8 million Americans have lost their homes to foreclosure since in 2007.
As a result, housing has been a dead weight on an economy still struggling to recover from the Great Recession. The Associated Press took a closer look at the competing ideas for fixing the housing market — from the Obama administration, the Republican challengers and the experts.
THE WHITE HOUSE
Obama proposed a program to let homeowners refinance their mortgages at today's historically low rates, even if their homes are worth less than they owe. The average rate for a 30-year mortgage is 3.88 percent, the eighth record low in a year.
The program would cover loans owned by government mortgage giants Fannie Mae and Freddie Mac and by private mortgage lenders. About half of U.S. mortgages — roughly 30 million home loans — belong to non-government lenders.
Administration officials offered few details but estimated that borrowers would save an average $3,000 a year.
The program would be paid for by a fee, characterized by the administration as small, on large banks. Further details of the program will likely be released in the next few days. Congress would have to approve the plan, a big obstacle.
It would expand the administration's Home Affordable Refinance Program, which allows borrowers with Fannie- and Freddie-backed loans to refinance at lower rates. About a million homeowners have used it, well short of the 4 million to 5 million the Obama administration had expected. Underwater homeowners didn't qualify under HARP but would qualify for the plan Obama discussed at the State of the Union.
Stan Humphries, chief economist at the real estate research firm Zillow, said the expansion could allow 10 million more homeowners to refinance. By preventing foreclosures and freeing money for Americans to spend, the program could give the economy a $40 billion to $75 billion jolt.
The Federal Reserve was more cautious, estimating that 2.5 million more Americans might be eligible to refinance through the expanded program.
THE REPUBLICAN CANDIDATES
The GOP field is skeptical about what the government can do for the housing market. Republicans argue that government programs to encourage homeownership caused the housing bubble — and are responsible for the housing bust.
“The best thing you can do is get out of the way because you want the prices to come down so that people will start buying them again,” Texas Rep. Ron Paul said Monday in a debate in Tampa, Fla.
In October, former Massachusetts Gov. Mitt Romney agreed with the hands-off approach: “Don't try to stop the foreclosure process. Let it run its course and hit the bottom.” Romney's 59-point economic plan includes no specific housing proposals.
In Monday's debate, Romney and former House Speaker Newt Gingrich called for revoking the 2010 financial reform law known as Dodd-Frank, which tightened regulation of banks.
They said the tougher rules were preventing banks from making loans. “If they would repeal it tomorrow morning, you would have a better housing market the next day,” Gingrich said.
Former Pennsylvania Sen. Rick Santorum offered one specific housing proposal: giving homeowners a tax deduction if they sell their houses at a loss.
Celia Chen, senior director at Moody's Analytics, an economic forecasting firm, says most housing analysts are starting to agree that the market won't recover without large reductions in the principal owed by homeowners who are underwater.
Underwater homeowners are more likely to stop paying their mortgages and to end up losing their houses. As their homes go into foreclosure, the backlog of unsold homes grows, pushing prices lower and putting even more homeowners underwater.
But mortgage write-downs would impose losses on lenders, including Fannie Mae and Freddie Mac. Their regulator, the Federal Housing Finance Agency, estimated last week that principal forgiveness would cost taxpayers $100 billion.
The Progressive Policy Institute and others have suggested a tradeoff: In return for reducing the amount of the mortgage, the lender would get to share with the homeowner any profit when the house is sold.
Writing down mortgage amounts has been tried in modest forms. The Obama administration's signature foreclosure prevention program, the Home Affordable Modification Program has used mortgage reductions as a way to modify loans.
The Hardest Hit Fund, a federal government-financed program for states with high foreclosure rates, has also tried to reduce some borrowers' mortgage amounts.
But they have had little success. About 98 percent of HAMP modifications have reduced interest rates. Just 31 percent, or 32,000 loans, have had mortgage amounts reduced.
Capital Economics' Diggle says a better-designed principal reduction program might turn the housing market around. But the options on the table now probably won't.
Diggle calls them a choice between an Obama plan that “won't make much difference” and a Republican plan that means “you're willing to accept years and years of grinding your way out.”