Plans for sweeping government bailouts and wholesale rewriting of mortgage terms that were unthinkable at the start of the U.S. housing crisis are gaining traction as other efforts to stabilize the market fall short.
Most efforts to date have been muscle-bound versions of traditional homeownership-preservation programs: borrower counseling, mortgage rate reductions, and, when the loss of a home seems almost certain, a halt to foreclosure to buy time.
The Treasury Department coaxed mortgage investors to try and freeze interest rates for more than a million troubled borrowers, and more than 230,000 letters were mailed out to distressed homeowners to publicize a national telephone help line.
But as the mortgage defaults continue to rise and begins to impact the economy more broadly, the goodwill efforts from the industry are proving to be insufficient, said Susan Wachter, a professor of real estate and finance at the Wharton School of the University of Pennsylvania.
She said the next steps must cut through complicated investor contracts that prohibit lenders from easing loan terms and must also account for a serious drop in home values.
We are seeing a real destruction of homeowner wealth, Wachter said. Whatever we do to address this problem, we have to deal with falling home prices or it will not work.
Many leading housing industry stakeholders, from builders to investors to lenders, will take part in the Reuters Housing Summit next week, which will explore how the housing crunch took hold and how markets can break free.
On Capitol Hill, lawmakers are mulling whether bankruptcy judges should be able to erase mortgage debt for insolvent borrowers, while others envision a government-backed entity that would vacuum up battered home loans.
But even those bold ideas might soon become outdated if the housing crisis worsens, said John Taylor, whose National Community Reinvestment Coalition first pitched a federal mortgage-buying enterprise early last year.
When we first proposed this, it had little support. Now it does but it will also take six to 12 months to set up. I just don't think we have that kind of time, Taylor said.
Markets and policy-makers will get a fresh look at the housing market's health next week with a survey of builder confidence on Tuesday and data on housing starts on Wednesday.
BOOM TO SLUMP
During the height of the recent housing boom in 2005, the median existing single-family home clocked an annual appreciation of 12.2 percent. Last year, prices dropped by 1.4 percent, the first decline since the Great Depression.
Loose mortgage underwriting was followed by a wave of failing loans that sparked a market panic last summer as the Wall Street firms which had stoked the housing boom chalked up billion-dollar losses.
Credit dried up for a wide array of borrowers as banks suddenly became fearful of lending to each other. Interest rates on so-called jumbo mortgages rose and corporate borrowing costs moved higher as well.
As the summer credit squeeze gave way to a fall and winter marked by continued market unrest, policy-makers concocted mortgage rescue plans that once seemed far-fetched.
The rate-freeze plan announced in December, for instance, was considered too complicated just ten months ago. Last week, Treasury Secretary Henry Paulson said the government might eventually endorse bolder ideas.
One idea being mulled by lawmakers and regulators would see mortgage servicers reduce the principal amount of a loan to the home's now lower market value.
Democratic Senator Charles Schumer of New York has called on Fannie Mae and Freddie Mac, the two government-sponsored enterprises that aim to foster mortgage market liquidity, to immediately state that when appropriate, servicers can and should make partial chargeoffs available to struggling homeowners.
But Dean Baker, co-director of the Center for Economic and Policy Research, says the time has come for stronger, iron-clad government policies to deal with the crisis.
I don't think the markets have shown a lot of foresight in dealing with the crisis to date, said Baker. He thinks insolvent borrowers should be allowed to stay in their homes as renters in a rent-to-own scheme.
(Reporting by Patrick Rucker)