FHA launches new refi program

Is your house underwater?

TEXT OF STORY

Kai Ryssdal: There's more than business and jobs that are wrong with the American economy right now. Today, the government rolled out the latest in a long string of programs to stop home foreclosures. It's aimed at houses that are underwater, where the mortgage is more than the house is worth. The Federal Housing Administration wants to encourage lenders to forgive some debt and in the process stop maybe a million and a half families from walking away from their homes. Nobody's had much success fixing the real estate market so far.

Marketplace's senior business correspondent Bob Moon reports that some are now saying it's time to stop propping up prices.


Bob Moon: The new program is narrowly focused at homeowners who have a stable income and remain current in their payments. The FHA will guarantee a modified mortgage if the lender voluntarily agrees to reduce the balance. Thus far, banks have been reluctant to do that -- even though more than one in five mortgages is estimated to be underwater nationwide.

The program is aimed at discouraging what's come to be known as "strategic default." But at George Mason University, real estate finance professor Anthony Sanders argues most underwater mortgage holders have kept on struggling to stay in their homes.

Anthony Sanders: If the strategic defaults aren't as bad as we feared, why do we have a strategic default program through the FHA?

Sanders predicts the program will help far fewer than the government estimates, and he contends it will disproportionately benefit those in the hardest-hit states -- Nevada and Arizona, for example, where more than half of all homes are estimated to be underwater.

Sanders: So in other words, we're just saying, "Well, if you happen to live in a state which had catastrophic housing failure, we're going to make people in Kansas pay for your writedown, 'cause someone has to pay for this."

Sanders is among a growing chorus of experts who say the government should let housing market find its own price level. But at the Harvard Business School, former FHA administrator Nicholas Retsinas says some government intervention is justified.

Nicholas Retsinas: The housing sector is too important, it's too important to our economy, it's too important to people's own balance sheet, their own sort of net worth, for government merely to be a spectator.

Retsinas says if anything, the government should have intervened more aggressively than it has.

Retsinas: I think they've tried to do the right thing. The problem is, it is no longer an issue of the housing market. It's really the broader economy and people losing their jobs.

For that reason, Retsinas fears the latest housing lifelines may be too little, too late.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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