A further downturn in the battered U.S. housing market has put the Obama administration in a tough spot with few tools to stem foreclosures ahead of congressional elections in which Democrats face big losses.
The administration has a $50 billion war chest to fight foreclosures, yet only around $200 million has been disbursed in a program narrowly tailored to help responsible borrowers.
A more aggressive effort is politically unpalatable and could fall short of solving a problem that has been made worse by rising unemployment.
At this stage in the game, there does not exist the political wherewithal to do anything that would meaningfully change the pace or the ultimate magnitude of the foreclosure crisis, said Raj Date, chairman of the Cambridge Winter Center, a financial services policy think tank.
It is very very difficult to engineer some kind of large-scale foreclosure relief that doesn't benefit at least one of two parties that (voters) don't want to help, he said, referring to mortgage bond investors and homeowners who bought houses they could not afford.
A report on Thursday showed contracts to buy previously owned U.S. homes rose in July, but any rise in sales would be coming off an extremely depressed level.
Sales plunged a record 27.2 percent to the lowest level in 15 years in July, while banks repossessed the second highest monthly number of homes on record. Data company RealtyTrac expects more than 1 million homes to be repossessed this year.
The administration has taken a number of steps to combat the rising tide of foreclosures, but they have fallen short of expectations and financial markets continue to speculate about possible new programs.
But any major push, such as the wholesale forgiveness of a homeowner's principal debt, is unlikely to find support among policymakers, both because of the cost and the big potential for a political backlash from any move that was seen as possibly rewarding reckless behavior by banks and borrowers.
With the November 2 elections fast approaching, President Barack Obama next week will unveil a number of steps aimed at helping the overall economy.
While he has pointed toward a number of possible options, including more tax cuts for businesses to encourage hiring, Obama and other officials have been silent on housing.
The administration has very few options left to address housing directly, said Howard Glaser, a consultant to mortgage lenders and a former housing official in the Clinton administration.
MICRO SOLUTION TO MACRO PROBLEM
The government is already lending the sector extraordinary support.
More than 80 percent of new mortgage originations in the three months through June were directly or indirectly backed by the government, including loans backed by the Federal Housing Administration and those securitized by government-controlled Fannie Mae and Freddie Mac.
But the administration's marquee foreclosure prevention effort, the Home Affordable Modification Program, is sputtering. Since its inception in April 2009, nearly half of the 1.3 million homeowners who have received initial help have dropped out. In fact, in recent months, more borrowers have been dropping out of the program than signing up.
Celia Chen, senior director at Moody's Analytics, said about half a million homeowners are expected to get a permanent modification to their mortgage payment by 2012 when the program ends, well short of the administration's initial goal of three to four million.
It's not working very well, Chen said. I suppose saving some homes from foreclosure is better than none.
The Obama administration, however, sees the glass as half full and argues the program has been a catalyst for loan modifications taking place outside of the program, which Chen expects to reach about 1.5 million by the end of 2012.
HAMP has been essential to assisting homeowners during the worst housing crisis in generations, said Treasury Assistant Secretary Herb Allison. The Obama administration remains fully committed to helping responsible, hard-pressed homeowners avoid foreclosure during this difficult time.
The original HAMP goal was simply too ambitious, according to Michael Larson, a real estate analyst at Weiss Research Inc.
It's a post-bubble environment. All the king's horses and all the king's men can't put it back together again, he said.
Larson notes that the lofty level of unemployment, which climbed to 9.6 percent in August, makes the housing crisis much harder to address than if it were simply a problem of adjustable rate mortgage payments about to skyrocket.
They are combating a macroeconomic problem with microeconomic solutions, he said.
Larson said that without the pressure of another crisis, there would be little appetite for massive interventions and, without an improvement in the jobs market, little prospect for a quick turnaround in the market.
I think we are going to continue on this muddle-through path for a while unless or until we get some kind of shock.
(Editing by Tim Ahmann and Andrea Ricci)