The bursting of the U.S. housing bubble in 2006 precipitated the December 2007-June 2009 recession and a financial panic in September 2008. Falling house prices contributed to rising foreclosure rates and lower consumer spending. In addition, mortgage defaults and the rise in foreclosures hurt financial institutions that owned the loans on the foreclosed homes, triggering a much broader collapse of the financial system. As credit flows slowed, so did economic growth. Because the housing market was a locus for many of the economic problems that emerged, some Members of Congress and other experts propose intervening in the housing market not only as a means of improving the housing market itself but also the financial sector and the broader economy. Supporters of housing market intervention argue that housing market weakness has a strong indirect negative effect on the balance sheets of households and banks, which dampens the recovery of the wider economy. Skeptics, however, worry that further intervention could prolong the housing slump, delay economic recovery, and affect outcomes based on the government's preferences. Since the housing bubble burst, the federal government has created multiple programs to aid homeowners, but their impact has been less than anticipated. Many measures have been proposed either to modify existing programs or to establish new efforts to improve the housing market. Three frequently discussed approaches are (1) reducing mortgage principal for borrowers who owe more than their homes are worth, (2) refinancing mortgages for borrowers who find themselves locked into paying high interest rates, and (3) renting out foreclosed homes. Principal reductions aim to improve the housing market by minimizing defaults and foreclosures, thus reducing collateral damage to the economy. However, principal reduction shifts the losses of borrowers to banks and other lenders. At the same time, principal reduction might improve the wider economy if it stimulates consumer spending, allowing borrowers to divert income from debt repayment to spending on other goods and services. Members of the 112 th Congress have introduced multiple bills that would reduce mortgage principal on certain loans. These include H.R. 1587 , the Home Foreclosure Reduction Act of 2011 (Representative John Conyers et al. ); H.R. 3841 , the Principal Reduction Act of 2012 (Representative Maxine Waters et al. ); H.R. 4058 , the Bankruptcy Equity Act of 2012 (Representative Earl Blumenauer et al. ); and S. 2093 , the Preserving American Homeownership Act of 2012 (Senator Robert Menendez). Principal reduction is also a component of a settlement reached between several mortgage servicers and 49 state attorneys general and the federal government. The Federal Housing Finance Agency (FHFA), the regulator and conservator of Fannie Mae and Freddie Mac, decided against allowing the enterprises to reduce principal for mortgages that they guarantee. All of these initiatives are discussed more fully in " Principal Reduction " below. A second approach, large-scale refinancing, helps borrowers who are current on their mortgage to refinance into a new mortgage with a lower interest rate. Because refinancing generally helps borrowers who are current, it is unlikely to have a major effect on the housing market, but it may prevent some foreclosures that could occur in the absence of a refinance. Some argue that refinancing would stimulate consumer spending. For example, a mortgage refinance could lower a borrower's monthly payment, freeing up more income that can be used to pay down debt or for non-housing-related spending. Some of the additional spending of borrowers may be offset by reduced income for investors. In a refinance, the previous owner of the mortgage is repaid on the loan earlier than expected and now faces reinvesting in a lower interest rate environment. Although some investors (including banks) may lose investment income from refinancing, other banks and mortgage originators benefit from the increased business associated with refinancing. Similarly, mass refinancing might cause Fannie Mae and Freddie Mac, two housing government-sponsored enterprises (GSEs), to lose investment income but gain from the reduced likelihood of default. It is unclear which effect would be larger. In his 2012 State of the Union address, President Obama proposed streamlining the existing program to refinance Fannie Mae and Freddie Mac loans and establishing a new mass refinancing plan for non-Fannie Mae and non-Freddie Mac loans. Congressional proposals for large-scale refinancing in the 112 th Congress include H.R. 363 , the Housing Opportunity and Mortgage Equity Act of 2011 (Representative Dennis Cardoza et al. ); S. 170 , the Helping Responsible Homeowners Act (Senator Barbara Boxer et al. ); and S. 3085 , the Responsible Homeowner Refinancing Act (Senator Robert Menendez et al.). These proposals are discussed more fully in " Large-Scale Refinancing " below. A third proposal, renting out foreclosed homes currently held by banks, GSEs, and other financial institutions, has the potential to stabilize housing prices by reducing the supply of homes on the "for sale" market. Current policy encourages lenders to sell foreclosed property quickly rather than rent out vacant homes. A successful rental program depends on house prices increasing in the future such that the rented properties can eventually be sold in a healthier market. In addition, renting foreclosed homes keeps the properties in use and reduces the collateral damage to communities. Unlike principal reductions and mass refinancing, renting foreclosed homes does not reduce existing homeowners' payments or increase their disposable income. Any impact on consumer spending is likely to be indirect through favorable effects on household net worth due to stabilizing house prices and preserving neighboring homeowners' equity. The program would only prevent foreclosure if, in lieu of foreclosure, it allowed delinquent homeowners to rent out their own homes. FHFA has started a pilot project to convert GSE foreclosed homes into rentals. Congressional proposals in the 112 th Congress to allow for renting foreclosed properties include H.R. 1548 , the Right to Rent Act of 2011 (Representative Raúl Grijalva et al. ); H.R. 2636 , the Neighborhood Preservation Act of 2011 (Representative Gary Miller et al. ); and S. 2080 , the Keeping Families in their Home Act of 2012 (Senator Dean Heller). These initiatives are discussed more fully in " Renting Foreclosed Homes " below. Table 1 summarizes the potential impact of these policies on three categories of households: delinquent borrowers, borrowers who are paying on time, and renters. Table 2 summarizes the likely impacts on house prices, financial institutions' balance sheets, and the broader economy. The remainder of this report will further analyze principal reduction, refinance, and rental proposals. First, however, the next section provides one estimate of the size of the housing market problem. In her September 2011 congressional testimony, Laurie Goodman, a senior managing director at Amherst Securities Group, estimated that 8.3 million to 10.4 million homeowners, approximately 15%-19% of all homeowners with a mortgage, are at risk of losing their homes in the next six years. Goodman's estimates are shown in Table 3 . Of the approximately 80 million homes in the United States, nearly 55 million have a mortgage. Goodman divides the mortgages into five categories and assigns an estimated default rate for each category to calculate the number of homes in jeopardy of transitioning to default (i.e., being more than 60 days delinquent on the mortgage). The five categories, in order of highest to lowest default rate, are (1) loans that are currently non-performing because the borrowers are no longer making their monthly payments; (2) loans that were non-performing but have become re-performing because the borrowers have resumed payment; (3) loans that have always been performing but have severe negative equity, meaning the borrower owes more on their mortgage than the home is worth; (4) loans that are always performing and the borrowers have moderate negative equity; and (5) loans that are always performing and the borrowers have positive equity. Goodman includes a "lower bound" and a "reasonable" estimated default rate for each of the loan categories based on current trends in the foreclosure rate and the pace of economic recovery. Goodman's analysis suggests two broad types of policy approaches for improving the housing market. First, policies could attempt to keep people in their homes by lowering the default rates. Principal reduction and large-scale refinancing are two frequently discussed proposals attempting to accomplish this goal. Principal reduction generally involves lowering the amount of the mortgage that is owed for borrowers who are delinquent, have negative equity, or are both delinquent and have negative equity. Large-scale refinance proposals generally target borrowers who are current on their loans but cannot refinance because of their negative equity. Both proposals attempt to lower monthly payments for borrowers as well as reduce default rates by stimulating the economy through reducing or redistributing the debt burden of the mortgage. The second approach implied by Goodman's analysis is to ease the transition of foreclosed homes into the market. Rather than flooding the market with foreclosed homes and potentially further lowering house prices, some have proposed converting the foreclosed homes into rental properties. Different proposals call for financial institutions either to rent the properties directly themselves or to sell properties in bulk to investors who would rent the vacant homes. The remainder of this report analyzes each of these three major policy proposals. As a result of falling house prices, an estimated 11 million-15 million homeowners owe more on their mortgage than their home is worth. Borrowers in this situation are said to be "underwater" on their homes or in "negative equity." Negative equity may impair a borrower's labor mobility, making it more difficult to sell the house and move for a new job, or limit the ability to use the house as collateral to take out a loan for a small business.