Homeowner Affordability and Stability Plan: Is It Really Good for Everyone?

President Obama took center stage yesterday as he unveiled the Homeowner Affordability and Stability Plan. According to the Executive Summary issued by the White House, the plan is expected to “help somewhere between 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure.”

In the first few paragraphs, the summary attempts to assuage taxpayers who are current on their mortgages. The release explains how foreclosures typically bring down the value of all nearby homes by as much as 9%. I’m not sure exactly where this statistic is pulled from but it seems little consolation for those who live within their means and are now being asked to bankroll this initiative through tax dollars.

Broken down, the plan has three primary components:

1. Refinancing for Up to 4 to 5 Million Responsible Homeowners to make Their Mortgages More Affordable.

   This portion is targeted toward homes where a conventional refinance program is unavailable due to the falling value of the home. Since most mortgages guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE) must represent less than 80% of the value of the home, owners are prohibited from refinancing as the value has dropped to make this ratio impossible. This explains why even though current mortgage rates are historically low, many homeowners are not able to take advantage of these rates.

   It may be a bit unclear exactly how this portion will be implemented, but loosening the requirements on mortgages conforming to FNM and FRE standards may be a good start.

2. A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

   This portion is aimed at “helping homeowners who commit to make payments to stay in their home.” With a hefty price tag, this program essentially gives incentives to both lenders as well as borrowers to come to terms and keep homeowners in the house and paying their mortgages. Under the terms of the program, “an incentive payment of $500 will be paid to servicers and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.” Following the initial incentives, an additional $1,000 will be offered to pay down the principal for each year the borrower stays current (up to 5 years).

   This sounds like a win-win situation until you realize that this is YOUR tax money hard at work. Granted, there is not any easy way to deal with the mess that we are in, but using taxpayer money to reward borrowers for staying current on mortgages seems to carry a significant conflict of interest. And that doesn’t even touch on how we will define “at-risk” loans and qualify who can participate in this program.

3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac

   The final piece of the plan is to promote liquidity in the market by expanding and backing financing to FNM and FRE. The Treasury is doubling its Preferred Stock Purchase Agreement to $200 billion, and will also continue to purchase Mortgage Backed Securities from the two entities. All of this capital is in addition to the already committed funds under the TARP program.

   It will be interesting to see just how effective these measures are at keeping mortgage rates low. And then secondly, we will need to figure out whether those low rates are even applicable (depending on how effective part 1 is). Liquidity can only be significantly impacted if other market participants step in and begin trading these assets. Otherwise we essentially have a socialist capital structure with very limited free-market efficient dynamics.

The equity markets did not have a pronounced reaction to the news which may be comforting. We are at a critical juncture and any additional weakness could send indices sharply lower as support levels are broken. Traders likely mulled over the plan overnight and today’s open could be a bit volatile as the positioning begins.

Precious metals, however seemed to spike a bit higher as the plan was announced. Gold hit a six month high as the added stimulus continues to erode the confidence in the dollar. This weak dollar is masked by the fact that many other major currencies are experiencing significant difficulties, but paired against Gold, it is clear that investors are looking for safety and voicing discomfort with paper currency.

One of the biggest criticisms of this homeowner plan will most certainly be that taxpayers are paying for irresponsible actions taken by banks, and homeowners who bought houses they could not afford. It will take a significant amount of PR from the White House to overcome this resistance and prove that this plan is best for all parties involved. Obama was careful to point out that this plan is aimed at those who “played by the rules” but fell on hard times.

My question is whether those “rules” were really in existence and how we will determine who those fair players actually are. Hopefully the picture will be much clearer in two weeks when the actual details are released… But somehow I doubt it.

Disclosure: No Positions

Comments

[Daniel Herkes:]

The plan may be flawed, but any attempt to stabilize the housing situation may be intrinsically valuable. Just the perception that this important market is dead drags it lower and lower. Scanning the news headlines in my in box reveals almost no positive news for over a year. At least stop the bad press, but don't sweep the problem under the rug.

Feb 19 06:01 AM

[deflation r...:]

All these bailouts make me sick to my stomach.

Feb 19 06:17 AM

[James Wilson:]

I would agree except for one thing.
The Predatory Lenders that the Bush Adminstration allowed to operate around the country when the Adminstration took states to court to prevent them from using Consumer Protection laws to stop the loans.

Ask Elliot Spitzer and many other Governors. Spitzer even addressed this in a story to the Washington Post in Sept. 2007.

The RNC hitman admitted that letter to the Post is why he was sent to take Spitzer down for reporting on the Presidents support of Predatory Lenders.

Feb 19 07:00 AM

[Paul Price:]

The message from our communist President Obama:

" Everything is free is the government pays for it."

The unspoken message-

"Once again the most productive and prudent citizens will need to pay much more in taxes to fund the imprudence of others."

There is no free lunch - except for all those who squander their assests and refuse to save and invest. Obama wants to take great care of them with OUR money so he can buy votes for his recently started re-election campaign.

Feb 19 07:57 AM

[nobull:]

Besides the moral disgust, what exactly is the point of this plan? How does this help the economy in anyway? All he accomplished is erase losses of a few gamblers. Housing is stalled because its overpriced. This will not create demand nor bring money into the system. What's desperately needed is new money in the economy. But acc to genius Obama, a 15K tax break for new buyers would be "too expensive". But its ok to throw 275B on a worthless program that rewards the people who caused the problem.

Feb 19 09:53 AM

[nobull:]

if the lenders did something illegal...go after them. But what's that got to do with giving away my hard-earned money for other people's houses?


On Feb 19 07:00 AM James Wilson wrote:

> I would agree except for one thing.
> The Predatory Lenders that the Bush Adminstration allowed to operate
> around the country when the Adminstration took states to court to
> prevent them from using Consumer Protection laws to stop the loans.

Feb 19 09:55 AM

[axelrod608:]

Reducing mortgage amounts makes losses for lenders. Reducing interest rates reduces lenders' earnings. I'd sure like to find the genius in DC who thinks these actions will "turn the economy around".

The piddling little being applied to the mortgage crisis - the major factor in the national economic downward spiral - will be ineffective. If the federales don't do something radical in that area, the downward spiral will persist.

Reducing mortgage payments by a few percentage points of income will not stimulate spending. All the current programs are a product of inside-the-box thinking.

Have the government pay off mortgages in full as foreclosures happen, taking a lien of up-to the amount it costs to pay it off. The lenders are made whole - no loss to write off and plenty of money to lend again.

Let the people stay in the house. They would be barred from taking out any equity loans on the property. With no mortgage payment, they will start spending again. Some payment plan should be started if they are still in the house after a period of time. Those payments would go directly to pay down the cost of the program.

When the home sells, the government gets the net up to the amount they bought the mortgage for.

This is the ONLY way to stem the tide of foreclosures. There are millions of ARM's out there that will be resetting well into 2012. They will be a continuing source of new foreclosures well into 2013 unless "foreclosure" is eliminated. And the only way to make the financial sector whole is to pay off those mortgages.

Eliminate foreclosures or they will persist for another five years, and all the other related problems will stay with us as well.

Feb 19 10:12 AM

[captainccs:]

This is a House Price Support Bill. It does not allow home prices to drop to their natural market level using taxpayer money to benefit those who already own a home but hurting future buyers who now cannot expect to see lower real state prices.

Who wins? Current owners
Who loses? Taxpayers and future owners who will not find affordable homes to buy

If a bank made a shaky mortgage deal and now is forced to take a loss, I won't be shedding a tear for them. That part of the plan is OK with me. Unfortunately, these shaky banks will be propped up by the Fed also using taxpayer money..

Feb 19 12:01 PM

[atlasman:]

Based on the CNBC video this morning Obama has lost the PR battle. It will be interesting to see how he handles this.

cnbc.com/id/15840232?v...

Feb 19 12:33 PM

[Consider_this:]

I hope by now, everyone realize this has now become a triple circular negative spiral.

Spiral A:
1. Jobs are lost
2. Product Sales go down
3. Companies retrentch
4. Jobs are lost.

Spiral B:
1. Home sales & prices go down
2. Bank balance sheet goes down
3. Credit dries up further
4. Home sales & prices go down

Spiral C:
1. Credit dries up further
2. Companies retrench
3. Jobs are lost
4. Sales plunge
5. Companies balance sheet weakens
6. Credit dries up further

This is no longer a simple case of a price correction anymore. It has legs. it can reinforce on its own. This is what's feared as the deflationary spiral.

I understand that Obama's attempt seems unfair, moral hazard, too small, (insert your complaint).

But you have to realize, this spiral *IS REINFORCING* and can run to ruinous results for everyone! Mark my words, nobody is immune, even renters and job holders on supposedly "immune" industry, goldbugs and even if you're off the grid and have your own food and bomb shelter, you are not immune!

So judge and complain if you will, but until you get what I said, you're not understanding the magnitude of this crisis.

One thing Obama said is true. Doing nothing is not an option.

This can absolutely spiral down for a long ways. What is the absolute floor you ask me? The absolute floor is when everyone have nothing to lose. Think back to WW 2 era; or how everyone owns nothing in GD. That's the "floor" where the spiral stops naturally.

Think about this next time you wish for the spiral to resolve on it's own. Be careful what you wish for, for you may get it anyway. Any actions may prove futile.

A lot of people still think this is a regular recession and there will be cyclical bounce and rebound. An almost cult like subscription to "there is a rebound" idea. Which is why the best action is to sit back and let it resolve on its own... I'm sad that this train of thought reveals that these people do not realize the depth of this rabbit hole.

I don't know if the anything *CAN* be done to prevent this down crash, if everything we do will be futile, but "doing nothing is not an option" is indeed the correct philosophy to deal with such devastation.

Feb 19 01:19 PM

[bobbobwhite:]

There is a giant difference between a homeowner and a house owner. One person can only have one permanent residence, but have you seen anything anywhere in Obama's housing plan that cancels out the loan problems faced by house owners as opposed to homeowners? I have not seen one word excluding speculative buyers who, when they bought each house other than their real home, convinced the lender that the house they were buying was their permanent residence. Thousands upon thousands did this very same thing to get a lower loan rate, and one of them is a neighbor of mine. Lenders bought it even when they knew it was a lie and never checked it out.

Will all these houseowners get a walk on all of their "home" loans as homeowners instead of speculators? It would be so easy to control this one issue and save taxpayers billions, but with the gov't doing it will be totally FUBAR and useless. As usual.

Feb 19 01:25 PM

[oilsands:]

Consider_this and Aslerod have the right line. This is a horrendous mess and we must think of it in terms of the "do or die" WWII mentality.
There is no completely right way. Thinking only about the investor's interests is a sure way to oblivion. It took decades to get into this mess; don't be so niave as to expect to solve it overnight. Carping about government stuidity or talking as if we have elected an emporer, rather than a President, and disbanded the legislature may feel good, but is totally useless.

Feb 19 02:22 PM

[3 degrees o...:]

Housing has not corrected to the balance levels (revision to the mean) as indicated in the Case-Schiller charts, much less entered overshoot territory. Not even close to those levels yet! I'm not interested in what the doomsayers in the comments above have to say until we reach that level.

Feb 19 02:42 PM

[atlasman:]

Consider this - Here are the problems with your spirals and the current plans:

1. Consumer credit has not dried up but is still pretty strong.
2. Having Judges cram down loans (favorite Dem proposal) and any interest principle reduction as a part of the Obama plan hurts banks and re-enforces this spiral.
3. The current plan will make buying mortgages harder for first time homeowners which will the bottom that much lower. (via higher interest rates and fewer banks willing to right mortgages)

Look, if you want to break this spiral lets start at the top and work on a plan that makes our businesses more competitive. Government only makes our jobs as business owners and entrepeneurs more difficult. That is the answer to this problem, not taking money from one group and giving it to another group.

Feb 20 07:45 AM

[Zachary Sch...:]

Axelrod - that's quite an interesting idea for a project. I wonder what kind of cost to the taxpayer we would be talking about? Also, its not without moral hazard, but it may be better than the extreme moral hazard we have in place with the current system.

Consider_this - you paint a very bleak picture and I'm not sure I totally disagree with you on the spiral effect. However, setting up programs which reward risky behavior will lead to more risky behavior. It will instigate bubbles in other areas (think Technology - to Real Estate bubbles). Doing nothing is certainly not an option. But we need to find better ways to reward innovation and hard work, not risky speculation and sitting on the government dole.

There are still many questions to answer and certainly no easy fix. Thanks for the comments all and the lively discussion...

Zach
zachstocks.com

Mar 03 03:14 PM