TW: I try not to get sucked into too many details on the various bailouts percolating out of DC, there are many of them (because we are in a precarious pickle) and they get very convoluted quickly. But Economist put together a readily digestible summary.
From Economist:
"...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 who owe nearly as much or more than the value of their homes. 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, in other words. Ideally, officials would no doubt prefer not to help such borrowers (just as they'd no doubt prefer to let bankers who'd made bad decisions go under). 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 (such that many who take advantage of the programme will nonetheless remain underwater). Perhaps, but by trying to leave principle alone, the government is avoiding excessive transfers of wealth to borrowers. A shared-equity plan might have been better, but this will halt some foreclosures and incent homeowners to stay in their homes longer. That's bad for economic mobility, but good for a glutted housing market. Ending the downward spiral of price declines, defaults, and bank sales leading to further, dramatic price declines has to be a top priority.
Another question concerning the plan is whether the incentives to rework the payments are sufficient. Presumably, it's already in the interest of lenders to reduce payments rather than foreclose, so it's unclear whether $1000 is going to alter the balance. This, I think, is a more serious point. The housing plan passed last year to help rework problem mortgages seriously underperformed—where some 400,000 borrowers were deemed to be eligible, actual applications numbered in the tens.
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. Still, what would have been really nice to see would have been a comprehensive plan to get borrowers out of ownership without forcing them into bankruptcy or rushing waves of new foreclosures to market—an own-to-rent programme, for instance. Defaults are an immediate concern, but for the long-term health of the economy, lingering debt is going to be an issue. If foreclosure rates slow, but households continue to battle to get their heads above water by drastically cutting spending to pay down debt, recovery will be a long time coming."
http://www.economist.com/blogs/freeexchange/2009/02/housing_repair.cfm
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