Helping Homeowners Refinance Mortgages takes Government Spotlight

The foreclosure problem has stymied the feds. Treasury and Federal Reserve officials are now considering programs that would provide direct help to at-risk homeowners, as other foreclosure prevention efforts have failed to produce results.

Lawmakers and the U.S. Treasury have been working on the foreclosure prevention problem for months. Up until recently, they've resisted loan modifications and other programs that would address homeowners directly, for fear of sending the wrong message by bailing out those who made ill-advised financial decisions. Instead, the feds have pumped money into banks and the FHA in various attempts to force lenders and borrowers to settle their differences. Unfortunately, it hasn't worked.

If all else fails, help the homeowner

The tide appears to be changing, however. Ben Bernanke, chairman of the Federal Reserve, recently went on the record saying that the foreclosure problem is threatening the overall economy.  Foreclosure prevention action is needed, Bernanke argued, to avoid a much wider circle of damage. The Fed's top official then proceeded to outline a surprising set of recommendations that would impact homeowners directly, including:

• Loan modifications

• Taxpayer-funded refinancing programs

• Treasury-managed subsidies to lower fees and interest rates on Hope for Homeowners mortgages

• Subsidies to share costs with mortgage servicers who reduce payments for borrowers

Further, Treasury officials are reported to be considering a plan to make low-rate purchase mortgages available to more Americans. This effort doesn't address foreclosures, but it would stimulate home sales. And that would work to offset the worst symptoms of the foreclosure crisis: an over-supply of homes on the market and their falling market values.

The plan, however, is still being debated. Some economists argue that offering cheap refinance mortgages as well would heal the housing market much more quickly. But such a foreclosure prevention strategy potentially increases the program's price tag tenfold.

A look back

The government has already spent hundreds of billions of dollars on various initiatives intended to alleviate the housing problem. There was the Housing and Economic Recovery Act of 2008, which included measures to modernize the FHA, establish Hope for Homeowners, and create a tax credit for home purchases, among other things. The FHA refinancing programs have been sharply criticized by the industry, and haven't gained any traction. Then the feds passed the Emergency Economic Stabilization Act of 2008, which established the infamous Troubled Asset Relief Program (TARP). The TARP has thrown more than $300 billion at the financial system, but it hasn't done much to alleviate the pain.

Many homeowners, falling behind on their payments, are simply waiting to get loan modifications or other foreclosure prevention strategies from the Federal Reserve and Treasury.  If they do, the situation could be vastly improved.