Obama's Housing Plan

I'm between classes, so here's a few quick takes from here and there on the housing proposal:

A good plan, except.., by Richard Green:. I just watched the President outline his mortgage plan. I think it has two of the three key elements necessary: it will get people's loan balance below the value of their houses, and it will reduce payments to a sustainable level. What is missing (or at least I think it is missing), is a clawback provision for those homeowners who get a subsidized loan and then profit on sale later. I think this is critical for fairness. But perhaps I have just not digested the details of the plan yet.

It was so refreshing to see a President explain things so well, though...

Comments on Housing Plan, by Calculated Risk: There are three parts to the plan. For each part, I'll provide the Obama administration overview (from the WSJ) and then add some comments ... my objections are to part #2. [...continue reading...]

Housing repair, Free Exchange: Today, president Obama unveiled his long-awaited housing plan...  the White House has provided a convenient four-page fact sheet (in PDF form)... Very generally speaking, there are three parts.

First, the administration will increase the number of homeowners able to refinance at current, low mortgage rates. Borrowers whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac will be able to refinance a loan up to 105% of the home's value (up from 80%, previously). This is expected to help about 4 to 5 million households... This seems like a reasonable step to take, though as Calculated Risk notes, it's a bit of a lottery. Those whose mortgages haven't been purchased by Fannie or Freddie are basically out of luck.

The second part is the one that's grabbed headlines; the president has dedicated $75 billion toward efforts to prevent foreclosures. Chief among these efforts is a plan to reduce monthly payments for troubled borrowers. For those spending greater than 38% of their income on mortgage payments, up to 43%, the government will ask lenders to reduce interest rates to bring payments down to the 38% level. The government will then match lender dollars, one-for-one, in bringing down interest payments until the borrower is only spending 31% of income. Both borrower and lender will be eligible for $1000 payments when payments are reworked, and if the planned payments are made. If it's necessary to reduce principle, then Treasury will provide assistance with this, as well.

This portion of the plan has drawn criticism, since many homeowners with too-large payments are those who took on irresponsible loan structures or who simply purchased too much house—who behaved irresponsibly... Ideally, officials would no doubt prefer not to help such borrowers... But frankly, that's not a top concern of mine. Rather, I'm interested in whether or not this is the best way to use $75 billion to halt foreclosures.

On that score, this is probably one of the better among a list of not-so-good options. Calculated Risk worries that this will only delay foreclosure, since interest payments are being reduced first, and principle written down only as a last resort... Perhaps, but by trying to leave principle alone, the government is avoiding excessive transfers of wealth to borrowers. ...

The final portion of the plan involves measures to "strengthen" Fannie and Freddie and to keep mortgage credit available and fairly cheap. All told, the plan will be funded to the tune of about $200 billion.

By itself, the plan is unlikely to turn the tide. In combination with the stimulus, the bank rescue, and the collapse in home construction, it has a chance. ...

Housing plan: "Clever," "smart," and "elegant", by Andrew Leonard: Some early, and mostly positive, reactions to President Obama's new Housing Affordability and Stability plan: The New York Times dubbed it "more ambitious than many housing analysts had expected," and "marks a sharp break from the housing policies of Mr. Obama's predecessor, George W. Bush." Felix Salmon, the influential financial blogger at Portfolio.com, described it as "quite elegant," and added that the "plan aims straight at the heartland, where it really matters." ...

At Tapped, The American Prospect's group blog, Tim Fernholz interviewed Barbara Sard, the director of housing policy at the Center for Budget and Policy Priorities, who said "the plan looks very good in a number of respects," and calls the various government incentives aimed at encouraging servicers to modify loan terms "smart" and "clever."

Barry Ritholtz at The Big Picture called it "a little better than I expected, but it still dances around an issue that is sacrilegious to many economists: Home prices are still way too high for any stabilization and/or housing bottom to form."

At Calculated Risk, the chief objection is that, while the plan explicitly aims not to bail out speculators or housing "flippers," it will still end up helping people who knowingly took on mortgages that under normal circumstances they could never afford. This is a valid criticism: Some people who don't deserve government will get it.

My own feeling is that it would be impossible to design a plan strong enough to provide any real stabilization to the housing sector that did not help out people who took advantage of exotic mortgage products and subprime lending standards to get into their McMansions. But the potential benefits for the economy as a whole from a successfully executed plan outweigh that drawback, in my view. The more critical dilemma is whether the plan is powerful enough to achieve its stated goals. The Obama administration plans to use $75 billion of TARP funds to pay for the incentives that will grease the desired loan modifications, and is extending another $200 billion to Fannie Mae and Freddie Mac via funding previously authorized by Congress. It seems clear that the Obama team is looking for ways to get the most bang for the buck, and $275 billion is nothing to sneeze at. But whether or not there is a thrifty way out of our current morass is still quite open to question. [Also: Obama's shiny new housing plan, by Andrew Leonard.]

And Now Homeowners, by Robert Reich: The two most important features of the administration's plan to help homeowners are (1) its support for amending bankruptcy laws to allow judges to modify mortgages. This will give homeowners bargaining leverage with mortgage servicers (and give the servicers more leverage with securitized creditors on up the line) to get better terms; and (2) a massive expansion of the government's commitment to Fannie Mae and Freddie Mac -- allowing F&F to buy more mortgages by increasing the government's guarantee against losses to $400 billion. ...

The Obama plan will help prevent a tsunami of foreclosures this year and next, but no one knows how big the wave may get notwithstanding. Nationwide, home prices have fallen 17.5 percent... But ... home prices probably could easily fall another 5 to 10 percent before bottom is reached.

And then what? Whether we're talking about the bailout of Wall Street, of the auto industry, or of homeowners, the biggest questions are (1) how long will it be until the business cycle turns up again? and (2) how long until the median value of financial assets, the demand for automobiles produced by the Big Three, and median home prices all return to where they were at the height of the bubble?

The answer to (1) is likely to be a year or two. But a turnaround is just the beginning. Taxpayers who are shelling out trillions of dollars (including, indirectly, commitments by the Federal Reserve Board), as well as people who are saving for retirement, many autoworkers, and a large number of homeowners won't be -- or feel -- safe until the economy at least returns to where it was in early 2007, and then continues to move upward from there. When will this be? It may take five to ten years, or longer; as to the Big Three, maybe never.

Obama’s Housing Plan: Who Will Benefit?, by David Leonhardt: In his speech in Phoenix today, President Obama emphasized that his plan would help those homeowners who had acted responsibly. “It will not rescue the unscrupulous or irresponsible,” Mr. Obama said. “And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.”

The political reasons to describe the plan in this way are obvious. ...

But the lines aren’t quite as clear as Mr. Obama suggested. In fact, his plan will end up helping a fair number of people who bought homes that they should have known they would never be able to afford. ... Which homeowners will benefit from this reduction?

Certainly, some who took out a reasonable mortgage and later lost their job will be helped. But people who bought too much house — and banks that allowed people to do so, or even encouraged them to do so — will also benefit. As distasteful as this may be, it’s the only way to make a serious dent in foreclosures and, in the process, to help the financial system.

These same political calculations help explain the public emphasis that the White House is giving to the relatively modest steps it is taking to help underwater homeowners — those with a mortgage worth more than the value of their house — who can afford their monthly payments.

These homeowners ... seem like innocent victims of the housing crash. The new plan will help some of them refinance their mortgage at a lower rate. But only loans backed by Fannie Mae and Freddie Mac — not many of the subprime loans at the heart of the foreclosure problem — will be eligible. ...

In fact, the number of homeowners that the White House estimates will be helped by the refinancing part of the plan — between four and five million — includes many who are not now underwater. Their mortgages are worth between 80 percent and 100 percent of their house value, which means they are above water but cannot refinance. (On many refinancings, banks require the equivalent of a 20 percent down payment, in the form of house value.)

So this plan will not help most underwater homeowners, and it will provide only a modest subsidy to those it does help. But as I wrote this morning, such an approach has many advantages. About $500 billion worth of mortgage debt is now underwater, and the number may eventually get close to $1 trillion. A plan that tried to put this debt back above water would be vastly more expensive... It would also deliver less bang for the buck, since a great majority of underwater homeowners are likely to continue making their monthly payments.

Obama's Housing Plan Unveiled, by Felix Salmon: I have to say I like the look of Obama's housing-bailout plan. It's quite elegant, and makes full use of the fact that Fannie and Freddie are now owned by the US government -- which means they can be forced to offer 105% loan-to-value mortgages even when the borrower isn't creditworthy at all.

Obviously, all of this comes at a cost to the US government: the figures being bandied around today range from $75 billion in the NYT to $275 billion at Bloomberg. But really nobody has a clue how much it will cost: that's entirely dependent on whether or not the plan succeeds in arresting the fall of house prices.

I especially like the idea of offering loan servicers $500 if they modify a loan before it becomes delinquent, especially if it's accompanied by an easy and streamlined mechanism for getting such modification requests into the Fannie and Freddie systems.

This plan isn't designed to directly help borrowers who are massively underwater: if your first mortgage is more than 105% of the value of your house, you're ineligible. That will help reduce some of the costs to the government, and move them over to the lenders, who now look as though they will be bailed in to bankruptcy proceedings -- a long-overdue development.

Incidentally, this plan is certain to increase the astonishingly high delinquency rates on non-agency mortgages, since it's basically designed to take most of the remotely viable non-agency mortgages and refinance them into agency mortgages, leaving only the complete and utter nuclear waste behind.

So far, there's not even a glimmer of a plan for how to get private-sector lenders back into the mortgage market in any significant quantity -- and that's going to hurt markets like Manhattan, where most mortgages are non-conforming. But Manhattan property owners are rich enough to look after themselves. This plan aims straight at the heartland, where it really matters. It's a good start, but it might well yet prove to be insufficient. We'll see.

Update: Tyler Cowen rounds up more reactions, and adds his own.