Underwater homeowners: You've got a friend in the Fed

House on stack of bills

The Federal Reserve can keep interest rates low forever, but until there’s a loan program to help borrowers who owe more than what their homes are worth, a sizable chunk of American homeowners aren’t going to be refinancing into lower rates.

If you’re underwater on your mortgage, you’ve got an ally in Eric Rosengren, president of the Federal Reserve Bank of Boston.

In a recent speech, Rosengren lamented that even though the Federal Reserve Open Market Committee, of which he is not a voting member, has now pushed 30-year mortgage rates to historic lows, falling home prices have kept 28 million borrowers who owe more on their mortgages than their houses are worth from refinancing.

"While the housing market would have been more severely impacted (and housing prices fallen more substantially) had the Federal Reserve not eased monetary policy aggressively, the impact of our policies on the economy has clearly been impaired by falling housing prices," Rosengren said.

Figure out a way to help these so-called underwater homeowners refinance, and you free up some cash those families could spend, which would boost the economy, he said.

Unfortunately, there are a lot of really complicated issues that have to be worked out before a program for underwater borrowers can launch -- like what happens when the original loan had mortgage insurance (does the policy stay in force?) and what to do about any second mortgages (what’s going to be in it for the second mortgage lender?).

Since Fannie Mae, Freddie Mac and FHA guarantee more than 90% of the mortgages getting made in today’s market, an underwater mortgage solution is going to have to come from the federal government.

Given Washington’s track record of failing to come up with programs that actually fix housing and mortgage market challenges, I don’t think we can count on Obama or Capitol Hill to solve this problem.

But the 12 Federal Reserve Banks are known for hiring deep thinkers. Maybe one of them can come up with a solution to help underwater homeowners refinance.

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