How the Mortgage Industry Can Help the US Economy

October 9th, 2012
in Op Ed, syndication

Written by

With the world still recovering from the 2008 global financial meltdown, the Federal Reserve is using every means necessary to stave off any potential mortgage-backed-securitiesSMALLthreats to the U.S. economy. On September 13 Chairman Ben Bernanke announced another round of quantitative easing to further stimulate the economy which is suffering from sustained unemployment above 8% and little growth in GDP. As seen on CNNMoney the next morning (the 14th), world markets were reacting with positively, pushing U.S. stock indices to their highest levels in five years. QE3, this round involving purchase of mortgage-backed securities by the Fed, continues the aggressive stimulus program it began after the financial crisis.

Follow up:

How Will The Fed Make a Positive Approach to the Market?

The Fed announced it will purchase $40 billion of debt every month for an indefinite period of time in an effort to inject long-term, stable growth in the labor market by bringing down the cost of borrowing. Quite simply, a reduction in mortgage rates provides economic stimulus by creating demand for housing and more refinancing, giving people more to spend. The Fed seems to believe that relieving banks of some of their MBS inventory will create more mortgage issuance.

It is no secret companies are hoarding deep pockets of cash, afraid to take on more cost and add workers due to fears of another economic recession and the reticence of consumers to increase their spending. QE3 is an attempt to alleviate concern by letting corporate leaders know the Fed will continue to get involved in an effort to inject life into the economy.

Improvements Brings a Light to the Darkened Economy

Coincidentally, one economic bright spot this year is the very same asset class that helped incite the 2008 crash and subsequent recession – residential real estate. The housing market has bottomed out (at least many seem to believe so) and is now beginning what could be a long-term trend upward.

Click on graph for larger image.


An improvement in housing prices led to a second quarter decrease in home mortgages being underwater, down to 10.8 million from the high of 11.4 million in the first quarter. In Southern California, housing prices are once again rising, spurred by increased August sales, which were up 9.0% in just one month and 14.2% higher than the same month a year ago.

Foreclosures and Their Impacts

The government’s 2011 shift in policy to address housing supply and not housing demand has been the stimulus for a significant decrease in foreclosures. Three million homeowners have lost their homes to foreclosure since 2009, but that number has fallen since the 2010 September peak. Congress is considering a plan that would help responsible borrowers significantly reduce their mortgage payments several hundred dollars per month, yielding mortgage holders a $3,000 per year increase in savings.


With homeowners stuck in mortgages at 6 or 7% interest and housing values beneath their pre-recession levels, there has been little mortgage relief available until now. This is an expansion of The Home Affordable Refinance Program (HARP) that has helped homeowners to stay in their residences. According to, with HARP homeowners whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae can refinance their homes if they meet a certain set of conditions. A recent analysis by Morgan Stanley concluded that refinancing half the mortgages held by these institutions would translate to a $46 billion dollar a year increase in capital for consumers to spend.

Unemployment and Its Negative Effects

A housing recovery has always been essential to signalling a turnaround in the economy and the infusion of jobs into the workplace. The construction industry was one of the hardest hit segments in the recession, losing 2.2 million jobs, approximately one quarter of all jobs lost in the financial crisis.


The massive pre-recession run-up of housing prices led to millions of new jobs related to housing, but the slow recovery in real estate has equated to a tepid recovery in that sector’s job growth. Unemployment among construction workers has been sustained above 12%, far above the nation’s recent unemployment figure of 7.8% in September. With GDP hovering below 2% so far this year, a growth spurt in housing could dramatically help this figure. Real estate construction has traditionally contributed 5% to GDP, more than double the current 2.3%.

HAMP Study Says Banks Unable to Deal with Volumes of Mortgage Mods

The government's mortgage modification plan has seen its downfalls as well as successes. While attempting to modify about 3-4 million mortgages, paper-work-buriedHAMP has completed only 1.2 million. A study has been released authored by economists from the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency and four high ranked universities which explained this shortfall. In the study, it was shown that the largest banks were not staffed or organized sufficiently to deal with high volumes of mortgage modifications, and would have come up short even without the added load from HAMP. The study also found that about 800,000 homeowners were not processed because of confusion in processing and clerical mistakes.

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