Obama's housing plan

I like the Fannie Mae portion of the proposal -- it makes sense to suspend the 80% equity rule, and encourage refinancing at lower rates.
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But I think that the other half of the program is far too generous to the bankers -- and to many individuals. We shouldn't be giving banks thousands of dollars to do what they should be doing already -- modifying mortgages by reducing principle to a level that can avoid foreclosure and is consistent with the current market.
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And the idea that we are going to reduce payments from 38% of income to 31% using tax dollars needs to be vigorously means tested -- and should only be implemented if the mortgagee cannot reasonably pay 38% of their income each month.
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A better plan would be to encourage mortgage holders to renegotiate the principle down to 100% of current market value, and then refinance at low rates through Fannie & Freddie. This would provide the banks with loads of new cash to maintain liquidity and improve bank stability.
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One other aspect I'd like to see included is a means by which people could "move down" in the housing market -- lots of people bought more home than they could afford, but can still afford to buy a cheaper home. People's whose credit ratings are going south because of problems associated with their mortgage should not be shut out of the housing market -- rather they should be allowed/encouraged to buy a house that they can afford.
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The latter proposal is especially important in terms of urban and inner-ring suburban housing. Those are the areas that we need to encourage people to buy in, in only for environmental reasons (the outer ring suburban McMansions that dominated new home construction for the past decade are part of the automobile culture that we can no longer afford.)

I think pluk brings up a good point, about the program being too generous to the banks. Per a discussion a few days ago I think there are ways for the bankers to help themselves, potentially without a government carrot to help them out.
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I'd like to see the 'move down' plan tried, mostly because it provides a way for the banks to keep money flowing in, and would get one less house off the market (compared to both houses going empty)
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I think I'm ok with the housing plan not helping those that are underwater that can still afford their mortgages. A house should be about a place to live first, and an investment second. The investment part might have gone out the window recently. It's still a place to live, if one can afford the initial terms, the terms should be honored IMO.
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-MBirchmeier

pluk,
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All of what you said except about being too generous. I think that really depends upon the stress test...doesn't it?
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Some banks Citi / BofA might need that extra incentive money just to stay in business. In my mind, it is an elegant way of getting the public on board to do something we all know is good for us to do any way.

I think that really depends upon the stress test...doesn't it?
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not as far as i'm concerned. This shouldn't be a backdoor bailout bill for Citibank, it should be about helping homeowners and stabilizing the real estate market. And while it should be done in a way that helps banks if possible (e.g. my suggestion that Fannie/Freddie issue refinance the loans on adjusted principle, giving the banks liquidity) the decision regarding if and when public dollars should be doled out to shore up banks should be done on a bank-by-bank basis.

Re: Obamas' Mortgage Plan The slippery slope of setting prices based on ability to pay.

Imagine walking into a car dealer, seeing a shiny new sedan on the
floor, asking the salesman “what's its price?”, and having the
salesman ask you how much money you earn. You answer $80,000 and he
says “half a year's pay -- $40,000.”

As you stand pondering, you overhear the salesman talking to another
customer about an identical car. That customer says he only earns
$50,000 per year. So, the salesman quotes him $25,000 --- half of his
annual pay.

Sound absurd ? It should because its commercially and legally
problematic The practice is called price discrimination based on
ability to pay, and any merchant who tried it would probably be stoned
by the public while being hauled off to court.

This technicality didn't faze Team Obama in the development of their
mortgage foreclosure plan. In fact, price discrimination based on
ability to pay is the plan's central operating principle.

Consider the example that Team Obama circulated on the day the
President unveiled the plan. A person (call him Able) is holding a
$220,000 mortgage at 6.5% with a 30 year payback term. Able's
principal and interest payment is be about $1,370 per month, or $16,365
per year.

Team Obama's magic ratio of payment to income is 31%, so if Able
earns more than $53,000 then he doesn't qualify for a government
induced loan modification. Let's assume Able makes just over $53,000
and doesn't qualify.

Able's neighbor (call him Skipper) lives in an identical home with an
identical $220,000 mortgage at the same terms – 6.5% for 30 years.
But, Skipper only makes $40,000 per year and is falling behind on his
payments.

Enter Team Obama's loan modifiers. Since Skipper only makes $40,000,
Team Obama says that he should only be expected to pay $12,400 -- 31% of
his income -- towards his mortgage. No problem. The lender –
subsidized by the dwindling number of taxpayers – just lowers
Skipper's interest rate to about 4% (3.93% to be precise) and
he's officially modified. And, if Skipper doesn't start skipping
payments again, he gets a check for $1,000 for each of the next 5 years.
Is this a great country, or what?

Let's look at Skipper's loan modification another way. Assume that
the lender holds the interest rate constant at 6.5% -- the same rate
that Able is paying. How can the lender get Skipper's payment down to
$12,400 ? Simple. Write off about $53,000 of Skipper's principal
balance. -- getting it down to about $167,000 – which amortized over
30 years at 6.5% crams the annual payments down the magic 31%.

In other words, Able and Skipper bought the identical houses at the
same prices. Because Skipper didn't earn enough to make the payments,
the lender, in effect, gave him a $53,000 price rebate to make it
affordable. We taxpayers then give him an additional $5,000 rebate if
he makes his reduced mortgage payments. So, Skipper gets the house for
$162,000.

Able – since he is able to pay -- gets no rebate. He still owns his
house at the original price -- $220,000.

Whether Skipper's mortgage is repriced by adjusting the interest rate
or by reducing the outstanding principal balance, the economics are the
same. It' is price discrimination based on a buyer's ability to pay
– a morally bankrupt tactic that should be illegal if it's not.

Otherwise, why not sell cars that way? Or for that matter, why not
force all merchants to price all their goods proportionate to
customers' incomes? Why should I have to pay the same price for a
can of Coke as Warren Buffet does? That's not fair, is it?

homak@msb.edu

@skipper: You said:
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"Sound absurd ? It should because its commercially and legally
problematic The practice is called price discrimination based on
ability to pay,"
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I see nothing modifying the price of the loan unless the bank is willing to do so. This is an incentive for banks to modify the terms of the loan so people can afford them.
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"Enter Team Obama's loan modifiers. Since Skipper only makes $40,000,
Team Obama says that he should only be expected to pay $12,400 -- 31% of
his income -- towards his mortgage. No problem. The lender –
subsidized by the dwindling number of taxpayers – just lowers
Skipper's interest rate to about 4% (3.93% to be precise) and
he's officially modified."
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I believe in this case skipper would be foreclosed upon. I would find it foolhardy for the administration to force banks to modify the loans that will no longer be helpful to both sides, rather only encourage banks to make loans affordable.
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"Whether Skipper's mortgage is repriced by adjusting the interest rate
or by reducing the outstanding principal balance, the economics are the
same."
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This can be done multiple ways, yes adjusting the interest rate, or principle is two of them, but loan lengths can also be modified. This would be akin to lengthening a 2 year car loan to a 8 year one if the customer were unable to make payments. Some of these loans might end up having their rates or principle reduced, but again, banks will be looking out for the banks on this one. I think banks will only reduce principle or interest rates if they feel the new numbers are more favorable than foreclosure.
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"And, if Skipper doesn't start skipping
payments again, he gets a check for $1,000 for each of the next 5 years."
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I believe the article states the checks go to the banks, not the homeowner.
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I do agree; that in this case Able appears to get hosed, simply because he bought a house he can afford. But lets be honest; these are not normal situations. We're in recession that's sharper and deeper than any in recent history. A recession that's being caused by issues related to housing and peoples inability to pay, which is causing banks no longer rely on what was once stable housing payments. To imply that this sets a new precedent for housing, or for that matter soft drink sales is a scary straw man, but one that doesn't hold much weight in my opinion.
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-MBirchmeier

Bleh... my kingdom for an edit button (and for that matter formatting. Things show up great in e-mail, but on the site, not so much).
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I made the point that Able appears to get hosed, but didn't elaborate further. It's not exactly fair that Able doesn't get modified to more favorable terms simply because he can afford his loan. Able is paying for the plight of others through increased taxes, but we're looking to get out of a recession which benefits all of us.
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-MBirchmeier