Obama’s Mortgage Plan: What is, and isn’t, in the Homeowner Affordability and Stability Plan

UPDATE: See this post for details released on March 4, 2009 regarding this plan.

The mainstream media, the blogiverse and the average Joe on the Street are all abuzz today with the “Mortgage Rescue”, “Homeowner Affordability and Stability Plan", “Homeowner Bailout” – pick your title.

Announced yesterday right here in our backyard of Mesa, Arizona, the President delivered his $75 billion (and counting) plan to stave off foreclosures.

I’ve made it pretty clear here in many past articles that I’m not a fan of big government and/or government intervention in a free market. Color me a conservative – it’s not a crime. But, and I say this with much trepidation, now may be time for the government to do something.

Things I like that Obama said:

But I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.

Speculators (who made up a large chunk of the Phoenix housing market boom) shouldn’t be bailed out. All investments carry risk. These investors knew that (or should have known that) going in. For those “investors” that jumped on the housing market boom without doing their research, oh well. The responsible homeowner and taxpayer shouldn’t have to pay for your ignorance and failure to complete your due diligence.

I’ve seen too many people using their homes like ATM machines. Anyone who thinks home values only increase hasn’t done the 3 minutes of research required to dispel that fallacy. These people need to reap what they have sown. Sorry if that sounds callous.

. . . we will create new incentives so that lenders work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure.

While it’s unfortunate that lenders need to be incentivized to do what needs to be done, the simple fact is they do. Most of this plan will be voluntary on the part of lenders. Perhaps the planned incentives will motivate some to play that otherwise wouldn’t have.

Things I don’t like that Obama said:

My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan.

Judges are people too, but they are not mortgage or financial experts. To give them the power of reducing principal balances – if unchecked and without proper education/training – is asking for trouble. How many will take the radical step of filing for bankruptcy just to get their principal balance reduced? As Jeff Corbet so eloquently pointed out in his great piece on “MObamanomics”, this provision may motivate lenders to pursue loan modifications. But I’m not sure that justifies a radical step like this.

Through its existing authority Treasury will provide up to $200 billion in capital to ensure that Fannie Mae and Freddie Mac can continue to stabilize markets and hold mortgage rates down.

It’s not holding mortgage rates down that I don’t like. Lower rates (if people can take advantage of them) are generally a good thing. It’s the slinging around of staggering amounts of money that concerns me. $75,000,000,000 here, $200,000,000,000 there, $787,000,000,000 for what some are calling only “Phase 1” of the stimulus package. Hell, I’m wearing out the “0” key.  We’re throwing trillions of dollars at these problems like it’s nothing. That frightens me. I’m not fond of the idea of every future descendant of the Thompson clan having to pay for our mistakes.

What I wish Obama had said:

Elimination of pre-payment penalties: I rarely hear this being discussed. Right now there are tens (hundreds?) of thousands of people (typically with sub-prime loans) basically locked into a current mortgage because they can’t refinance due to (often ridiculous) pre-payment penalties. Many times reducing a mortgage payment by only a couple of hundred of dollars a month would help someone on the edge keep from defaulting on their mortgage.  “Waiving” pre-payment penalties might allow some to refinance, thereby saving their home from foreclosure.

Call me crazy, call me a heretic, call me whatever. What’s about to follow will likely piss some people off. Oh well.

Falling home prices are not all bad: What I see very few people mentioning is that there are some good things about declining home prices. OK, I am a homeowner. Of course I’d love to see my home’s value increase every single day. This isn’t a realistic expectation, but I’d still love it. The simple fact is, declining home values mean homes become more affordable. Better affordability means more people can buy a home. It’s basic economics folks – Demand curves and the Law of Supply and Demand and such. This market will reach equilibrium, with or without government assistance. That equilibrium point may lie lower on the price axis then people would prefer, but the government mucking about isn’t going to change fundamental laws of economics.

On reduction of principal balance

This is a tricky one. Many are saying that unless existing mortgage balances are written down to existing market values, nothing will help. My problem with this is two-fold. Primarily, I simply don’t know how this could possibly be managed. There aren’t enough appraisers on the planet to determine “market value” of every existing home – or even just for homes where the owner wants their principal reduced (which would be basically anyone that bought, or did a cashout refi, on a home in the past 2 or 3 years).

What about the prudent home buyer that saved for a down payment, didn’t use the ATM feature of the boom, and is not currently underwater? They get to slog along as they are now, while the neighbor that refinanced and got cash for the new car and a trip to Disney World gets his principal balanced reduced. In other words, some of get to finance others transgressions. That should go over well.

And when does the writing down of balances stop? Do we just write down mortgage balances carte blanche when prices continue to decline? In 2012 (or whenever) when there is another downturn in home prices, do we engage in another wholesale write down? Home values are cyclical, always have been, always will be. Setting a precedent that the government will step in with a wholesale write down when prices decline could be a recipe for future disaster. 

Will this mortgage rescue plan work?

I don’t know, but I have my doubts. Many of the details are to be released on March 4. Until then, we can only speculate and assume – neither of which are particularly good things to do.

Most disturbing seems to be one of the guidelines that will help people who are underwater on their mortgages limits refinances to 105% of current market value. Prices in Phoenix have dropped 30 – 50% depending on where you look and whose statistics you believe. 5% wouldn’t seem to touch it.

Clearly this isn’t a cure all. Obama even made that point. A step in the right direction? Maybe. Opening a big giant can of crap that may take a generation to undo? Maybe.

I’m not smart enough to know all the answers. A large part of me says that we suffer through it, painful as that will be, and let the market correct itself. I happen to think it will. Guys with Nobel Prizes in Economics think so too.  I suppose a nudge in the right direction could speed things up and/or  lower the pain threshold. But we need to be very careful. I’m not sure we are thinking all the ramifications through as Congress passes trillion dollar bills the no one has read and we start doinking with fundamental economic laws and principals.

I’d love to hear your thoughts. . .

Others Opine:
Morgan Brown at Blown Mortgage
Tom Royce at The Real Estate Bloggers
The White House Blog (yes, that White House)
Jeff Corbet, The X Broker on AR
Michelle Malkin
Chris Butterworth at The Phoenix Agents
Spencer Rascoff (Zillow COO) on Active Rain
Greg Swann on Bloodhound Blog
Have a good link? Drop it in a comment and I’ll add it to the list.

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