Home loan relief is becoming more controversial as the Obama administration continues to make moves to forgive mortgage debt with short refinancing initiatives that will write-down home loans for homeowners that find themselves stuck with underwater mortgages.  Republicans and Democrats alike are complaining that Obama is trying to buy votes with debt forgiveness. 

With home mortgage rates at the lowest point since Freddie Mac began tracking interest rates, what more can the Federal Reserve do?  The Fed has little power left to lift the economy out of its rut. Congress, with an election looming, has no appetite for more stimulus. Typically, the Fed can lower home loan rates in an effort to stimulate consumer spending in hopes that it will invigorate the economy. But the benchmark interest rate controlled by the Fed has been almost zero percent for more than a year now. 

The Obama administration already funded the Home Affordable Refinance Program that enabled mortgage refinancing to 125% on select Fannie Mae and Freddie Mac mortgage portfolios in an effort to combat the highly deflated home values that have prevented many Americans from being approved to refinance into a more affordable fixed mortgage payment. 

Eligibility for the HARP home loan relief was difficult and not enough homeowners met the requirements set forth to refinance their underwater mortgages.In a recent article, Deutsche Bank indicated that there may be 20 million underwater mortgage loans that are outstanding by the end of 2011.  This puts a significant amount of pressure on homeowners that are already struggling with high unemployment and tighter loan guidelines.

 Now the government has given HUD the authority to approve an FHA short refinance option that actually reduces the principal mortgage balances.  FHA insures home mortgages, but the agency has nearly used their emergency loan reserves.  Who do you think is paying for this?   – - Yes the U.S. tax payers will be picking up the tab on this mortgage bail-out initiative as well.  And if that’s not enough risk for the government, they also agreed to another mortgage relief initiative with the Emergency Homeowner Loan Program that is designed to help self-employed and un-employed homeowners for six months.

The Fed announced this week they it would use the proceeds from its huge portfolio of mortgage securities to buy government debt. The idea is to make cheap credit even more affordable, particularly for things like mortgage loans.  The problem is that Americans who are worried about job stability, not to mention volatility in the stock market, don’t want to borrow. They saved 6.2% of their disposable income this spring.

Sure, the Federal Reserve still has options. It could launch another trillion-plus-dollar program to buy government debt or mortgage securities like it did when it was battling the recession and financial crisis.  But the Fed is unlikely to commit that much money unless things get a lot worse. Plus there are risks. Regulators are resistant to push interest rates on low rate home loans because they don’t want to artificially jump-start the housing sector like what happened that inflated the housing bubble.  The Fed could slash the rate it pays banks to zero in an effort to keep money parked there, a move aimed at getting banks to lend more, but banks are not exactly feeling cash-rich, either. 

As reported previously, home mortgage rates have fallen to record lows.  15-year mortgage rates fell to 3.92 % this week and rates on 30-year mortgage loans were published at 4.44 %.  Still, consumers aren’t in a mad rush to purchase homes and most homeowners are unable to meet the tighter guidelines for FHA refinancing.  HUD is considering implementing a minimum credit score and FHA guidelines may start requiring these higher risk borrower to put as much as 10% up for down-payments in an effort to stem foreclosures and loan defaults.  Many mortgage lenders believe that if the loan requirements were loosened for a period to get the distressed homeowners approved for refinance loans or loan modifications that our housing sectors will rebound locally and nationally.