The way to fix housing is staring Congress in the face

Hand holding picture of house against landscape

The Federal Reserve usually sticks to tinkering with interest rates -- it’s the reason mortgage rates are at their lowest point in decades -- but lately, Fed officials have been thinking they ought to stick their noses into the housing mess.

That’s a bit out of the box for the Fed, but some of its ideas could be great for home buyers, sellers and owners who don’t have enough equity to refinance their mortgages.

The Fed has come up with a laundry list of ideas for jump-starting the housing market, including looser lending standards, selling big batches of foreclosures, refinancing programs and speeding up short sales.

Here’s who would win and lose if Congress decides to listen to the Fed and put those suggestions in place:

Make it easier to get a mortgage

Lending standards are tight. While having a credit score of 620-640 used to be good enough, it now takes a score of more than 700 to buy a home or refinance a mortgage.

Half of new mortgages and about 70% of the loans guaranteed by Fannie Mae, Freddie Mac and FHA are made to home buyers and homeowners whose credit scores are 760 or higher.

Before the housing crisis, less than a third of mortgages were going to people with credit scores that high.

Today, about half of U.S. consumers have a credit score of 720 or below, according to data from the Federal Reserve Bank of New York.

Easier qualification would mean more buyers could get home loans so more sellers could sell and more homeowners could refinance existing loans.

Who wins: Home buyers, home sellers, homeowners.

Sell foreclosed homes in bulk to investors

The government would take foreclosed homes held by FHA, Fannie Mae and Freddie Mac and sell them in bulk to investors who would then turn them into rental properties.

Who wins: Investors who have piles of cash to buy hundreds of foreclosures at once and then collect rent at a time when rents are rising. Home sellers would benefit, too.

Having fewer foreclosed homes for sale means less competition for buyers for your home.

Who loses: Home buyers. Foreclosed homes are sold at bargain prices, and that creates downward pressure on all the home prices in the surrounding neighborhood.

Fewer foreclosed homes for sale means fewer bargains for you. Mom-and-pop real estate investors can’t get in on this deal because banks aren’t funding mortgages for small-time investors who buy one house at a time, so they can’t take advantage of the deals the big investors will get.

Make it easier to refinance a mortgage

So far, the government’s HARP program has focused on homeowners with good credit who owe more on their mortgage than their home is worth.

About half of existing homeowners have enough equity to refinance, but their blemished credit is keeping them from getting a loan. They need help, too.

The Fed suggests solving this problem by streamlining mortgage refinances for homeowners with at least 20% equity (so if you have a home worth $100,000, your mortgage is not above $80,000) and making some changes in the rules lenders must live by so they’re more willing to refinance your mortgage.

Who wins: Homeowners who have scratch-and-dent credit and those who don’t have enough equity to refinance.

More foreclosure alternatives

A short sale is often the best solution when you just can’t afford your home any more and foreclosure is imminent. In a short sale, the bank lets you sell your home for less than what you owe on the mortgage.

Short sale homes sell for higher prices than foreclosures, so banks lose less, neighbors don’t see their own home values driven down by a low-ball foreclosure auction and the seller can make a graceful exit.

The Fed doesn’t actually have any concrete suggestion for creating more short sales, but it does support the idea of having more of them.

Who wins: Underwater homeowners who want to sell, buyers interested in deals, financially troubled homeowners who can’t hang onto their homes.

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