The Royal Bank of Scotland (RBS) said US officials need to lower unemployment and keep troubled borrowers in their homes through mortgage modifications or refinance programs in order to accelerate an economic recovery. Policymakers need to increase the supply of credit and moderate the rate of foreclosure, as well, RBS analysts said today in a special report on non-agency MBS strategy. “We anticipate that, to the extent that a consumer rebound lags, the Obama administration and Congressional Democrats will find themselves increasingly motivated to deploy these levers, both as good housing policy and as crucial political strategy heading into the 2012 presidential election,” RBS analysts said. “In contrast, we do not believe that a streamlined refi program advances either housing policy or political objectives.” Still, as mortgage origination declined and housing prices fell during the past three years, “the economics of the housing market are still somewhat complicated,” RBS said. One very powerful influence on housing prices is that annual foreclosures over the past couple years are higher than the number of new single-family homes sold during the peak years of the market in 2004 and 2005, according to analysts at the investment bank. RBS said a streamlined refinancing program could help improve the housing market, despite myriad naysayers and the fact the Treasury Department has disavowed such an action. But analysts said this type of plan could increase agency borrowers’ discretionary income via an interest-rate reduction; provide a small amount of stimulus; “have less impact than an equivalent amount of stimulus funds transferred directly to taxpayers” as a check; and not significantly impact default probabilities, as negative equity impacts a mortgage more than interest rates. While the analysts don’t expect a streamlined refi plan to pass, they do foresee a wave of refinancings “that would jeopardize the value of premium agency passthroughs.” RBS also said both principal forgiveness modifications and short refis should help lower foreclosure rates, mitigate negative house-price movement, and reduce loss severity. “We think the government will conclude that it is more productive to focus on creating jobs, keeping troubled borrowers in their homes through alternatives to foreclosure, creating the conditions for an increase in private funding of mortgages, and creating responsible affordability products,” RBS said. Write to Jason Philyaw.