Big Leap into the Unknown
"In discussing the U.S. economy, Fed Chairman Bernanke also admitted that its performance has fallen well short of the central bank’s expectations. Moreover, “temporary factors can account for only a portion of the economic weakness that we have observed.”
The clear if obvious culprit is housing.... housing led the economy out of every recession since World War II. ....monetary policy obviously isn’t working despite record-low mortgage rates because of ... homeowners being “underwater” with houses worth less than their loan balances.
“Good, proactive housing policies could help speed” a recovery in that sector, Bernanke said, without being more specific. The New York Times Thursday reported the White House is mulling a plan to permit homeowners with government-backed mortgages to refinance at rates as low as 4%. Such a plan would help improve the transmission of monetary policy by giving homeowners the same benefit enjoyed by corporations, which Bernanke noted have been readily able to obtain low-cost credit in the bond market."  

If the administration supports a hefty reduction in rates for those underwater, this would provide the first real relief for homeowners.  Past modification programs from banks have lowered interest rates, but then have tacked onto the principal  an amount equal to the original note rate and the temporary relief interest rate.  Very discouraging - the homeowner goes from 15% underwater to 20% underwater!  Other programs lowering monthly payments extend the amortization from 30 to 40 years.  Everything was crafted to avoid reducing absolute debt amounts and consequently lowering asset values on the books of the banks.


Let us hope this one sticks.  It should staunch the slide in home values. And  the number of homeowners facing defaults.  Now, if lenders were to go further and reduce loan amounts to something near market values, that would be a giant leap forward.  The motivation for homeowners to do everything possible to keep their homes would be huge.