Obama's Housing Plan: A Step in the Right Direction

By James Kwak

I don’t have a lot to add to Simon’s article about the housing plan in The New Republic - as you might imagine, we did talk about it - but I do want to take issue with the title, “Insufficient Boldness.” One quirk about writing for other publications is that you usually (not always) have complete control over the body of the article, but no control of the title (and often you don’t know what the title will be until you see it printed).

I agree that the main concern is that the plan does not go far enough. This is because the main proposal for struggling homeowners is to provide cash incentives to lenders. It is impossible for the policy wonks in Washington to predict just how many mortgages will be modified with the bonuses offered. If they are acting rationally (I know, a big if), the lenders have already done a calculation on every delinquent mortgage they hold, and they have already decided not to modify the vast majority of them. So the question is, will a few thousand more dollars (note that this is more than was initially proposed by Sheila Bair) tip the equation toward modification? And in how many cases? (There is one scenario under which this could unblock the modification process: perhaps the lenders have been holding out on modifications so as not to lose out on the government bonuses, and now that they know what the bonuses are they will start making modifications. But there’s no good way to predict the size of this effect.)

So I think that the Obama team has to be ready to sweeten the pot later - or take other, more aggressive measures - if this plan does not have the desired effect. Of course, if they were going to do that, they wouldn’t announce it now (because you don’t want lenders just to hold out for the next round of larger bonuses). So maybe that is the plan.

But on balance I think most of what is in the plan is helpful. If only it had come, say, twelve months ago.

Comments

[User 143167:]

105% LTV is good? That is negative down payment. It looks to me another subprime all over again. Well, maybe our politicians believe the only way to cure this subprime crisis is to issue more subprimes, backed by the government and paid by the taxpayers this time though.

Feb 19 11:01 AM

[P. Kalven:]

"But on balance I think most of what is in the plan is helpful. If only it had come, say, twelve months ago."

Exactly; at least it is a plan, ridiculous or otherwise and not an ongoing meaningless gripe.

I am sure anyone who may benefit from the largess here will appreciate the assistance.

It takes a thousand small steps, right or wrong this is one. Greed and avarice are the culpable parties here, not people trying to meet their financial obligations.

Feb 19 12:10 PM

[Socialism c...:]

THEFT is never a step in the right direction! This Marxist is going to spark a revolution, in addition to driving us into full-blown depression!

Feb 19 12:50 PM

[sabre_jenn:]

The plan doesnt go far enough???

The plan penalizes people who lived within their means, and rewards people who were irresponsible. Don't start with your moronic "victim" nonsense-- you signed the contract, you are at least 18yrs old, you are an adult. It was your job to ask questions if you didnt understand. There are no victims here -- just people who should have known, and DID know, that they were buying a house they could not afford

It is not our job to rescue these people from themselves.

Obama's plan is offensive to everything America used to stand for. He has taken the foolish moral hazard behavior of Bush (whom we all seem to agree was an idiot) and raised it to whole new levels

Obama is behaving exactly like Bush, but is making Bush like mistakes on much much much bigger scales. Bush wasted $350 billion on TARP, which was already asinine. Now this new guy wants to do exactly the same thing, but spend four times as much?

It will take a first class idiot to unseat George Bush as the worst President in memory... I fear Obama is up to the challenge

Feb 19 02:16 PM

[Larrysyr:]

I could go along with doing nothing about the housing situation if the damage were limited to irresponsible borrowers, lenders, executives, politicians, etc.

The problem of the moment, however, is that the housing crash is dragging a lot of responsible people under water. Lost jobs, lost home values, wiped-out 401(k)s, bankruptcies, and all other manner of financial mayhem are hurting a lot of people who conducted their lives prudently.

The Obama plan is a measured response attempting to stabilize the chaotic crash in home values. It does not bail out every homeowner. Housing values will decline to a sustainable level, but if the drop can at least be slowed to a predictable rate, the market can sort out the rest of the details.

Feb 19 04:01 PM

[Can'tSpotAB...:]

Saving the Housing Market By Speeding Up Foreclosures

www.time.com/time/busi...

The housing plan needs to be shelved. Yes it is unfortunate that people attempted to live beyond their means, but I do think those that did live within their means should pay for the mistakes of those that did not. Normalcy will NOT return to ANY market until the bad debt is forced into the open and defaulted. It won't be painless I can assure you, but it will give us a place to begin rebuilding our economic system on a solid base.

Feb 19 04:11 PM

[User 347440:]

$8000 per loan, minus fees and such for the people who work the loans won't do a thing.

Feb 19 04:30 PM

[polo:]

Whatever we do, we are not creating new wealth. It is simply wealth re-distribution. Some will be happy and some cry regardless what program you come up with. Government could be creative. How about sell green card for any foreigner who buys a house in USA? That would help some of the capital move from China and other countries.

Feb 19 11:32 PM

[JohnL:]

All arguments about whether the plan is a step in the right direction should only proceed once it is agreed that the plan is constitutional. Can you point to any language in the U.S. Constitution that authorizes the government to take wealth from law-abiding citizens and use it to help out those who made bad investment decisions? I looked and could not find anything like that.

Feb 20 03:30 AM

[atlasman:]

The arguement that millions of people are the victim of predatory lenders that sold them a bill of goods is the world's largest strawman. Just call it what it is, spreading the wealth from the prudent to the ones that lacked prudence (with a few exceptions). I am not sure why Obama wants to punish and make more difficult new first time homeowners but that will be the result. He must feel they are not in his target demographic group.

Feb 20 07:29 AM

[Urbane Gori...:]

I agree. We had eight years of G. Bush sitting on his hands while this mess emerged and not a peep from anyone. Obama has been in office for a fraction of that time and all I hear is whining as he tries to clean up the detritus left by the prior administration. Aside from the silly 'let them all fail' comments, I haven't heard one sensible counter plan from any of the whiners.

jegan (ex-GOP)

On Feb 19 12:10 PM P. K. wrote:

> "But on balance I think most of what is in the plan is helpful. If
> only it had come, say, twelve months ago."
>
> Exactly; at least it is a plan, ridiculous or otherwise and not an
> ongoing meaningless gripe.
>
> I am sure anyone who may benefit from the largess here will appreciate
> the assistance.
>
> It takes a thousand small steps, right or wrong this is one. Greed
> and avarice are the culpable parties here, not people trying to meet
> their financial obligations.
>

Feb 20 08:52 AM

[Urbane Gori...:]

Not sure where the Constitution factors in to this. The government spends money for the general good. I surely didn't want my tax dollars going towards attacks on Afghanistan or Iraq. Nor do I want my tax dollars being used to save the 'rubber tip arrow' enterprises, or Alaska's bridge to nowhere. I am quite comfortable spending tax dollars on general healthcare. The problem is we live in a country with a representative government and we all have to not only hope for the good, but accept what we consider to be the bad. Welcome to America!

jegan


On Feb 20 03:30 AM JohnL wrote:

> All arguments about whether the plan is a step in the right direction
> should only proceed once it is agreed that the plan is constitutional.
> Can you point to any language in the U.S. Constitution that authorizes
> the government to take wealth from law-abiding citizens and use it
> to help out those who made bad investment decisions? I looked and
> could not find anything like that.

Feb 20 09:00 AM

[Drew Horn:]

The Obama's housing plan is just one step on the road to socialism. It rewards the mortgage originators who were responsible for duping a lot of people who didn't bother to hire a lawyer to explain the contract they signed. Not a word of new lender regulation has been announced. It seems that Obama is simply rewarding those that caused the problems.

The home price bubble was created over a period of about 10+ years motivated by a combination of limited supply due to 1) local zoning + illogical building codes, etc, 2) inadequate regulation of unethical (usually non bank) lenders, and 3) uncontrolled population growth caused by illegal immigration. All of these causes were, in one way or another the responsibility of governments. The sad thing is that Obama's plan changes none of them and simply uses national debt to subsidize the people who caused the problem.

Obama seems to be telling us that he wants us to go back to 2007 when the charge card and home price bubbles were at their peaks. He and his economic team seem to be incapable of envisioning anything but a return to false values.

Feb 20 09:10 AM

[Ferdinand E...:]

Urbane Gorilla, you didn't hear about any counter-plan from anybody because they don't have one. What they have is a barely controlled fury due to Obama's presence in the White House, and a straightforward hope that he fails. He may succeed, or he may fail - only time will tell - but one thing is certain: better Obama than the man who was willing to subject the country to a hundred years of war in order to win a war that was won five years ago.

Feb 20 10:01 AM

[Larrysyr:]

Talk of Socialism is a good way to try to shut down discussion.

Sheila Bair, who became FDIC chair before Obama even announced his candidacy, has endorsed Obama's plan as a reasonable attempt to stabilize the housing market. When asked the question about the prudent suffering for the sins of the irresponsible, she was forthright in admitting that was not a good thing, but that the wave of foreclosures is pulling everyone down, including the prudent. (She also said she has a 15-year fixed-rate mortgage and has never been late on a payment.)

The government has a legitimate role in looking out for the general welfare of the country.

Obama's plan is an attempt to stabilize the patient before doing real surgery that leads to healing.

$75 billion, or $275 billion, is nowhere near enough to boost housing prices back up to their bubble levels, or to stop every foreclosure. It may be enough to cushion the shock of so many simultaneous foreclosures so that the market normalize itself in a slightly more rational time frame.

We know the consequences of giving the free market free rein here. We're already seeing it.

Obama's plan may not work; it may even be the wrong approach. Offer critiques and alternatives. The label Socialism, however, is no substitue.

Feb 20 10:45 AM

[Mad Hedge F...:]

Here is another thought about Obama’s mortgage bailout plan. It is so small, and helps so few people, it isn’t really a bail out at all. It doesn’t help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.

Feb 20 11:00 AM

[1234987:]

Housing solution!

I, Remove 2 million homes from the MLS (for Sale) that financial institutions currently have
for Sale. Any Institution that received TARP funds will be required to first offer the home
to the RTC for purchase. RTC will not purchase any home above $417,000. No Jumbos.

2, Government Resolution Trust will purchase these homes from these institutions for 20%
less than original first Mortgage amount. No negotiating.

3, 600 billion dollars to buy these homes (app $300,000 each average) will come from the sale
of long term 30 year bonds. (Currently app 3-5%) issued by Government.

4. RTC will send these homes to the local HUD offices for disposition thru voucher program
(rentals). $5000 will accompany each home for repairs & upkeep. eventually as the MLS
system reaches certain inventory levels (i.e. 30-60 days) HUD will be allowed to place these
homes on the sale market. If the inventory increases HUD will remove homes accordingly.
This will be a local HUD market decision, differing from region to region. Rental Income will
help cover expenses such as maintenance, insurance and property taxes.


Pro's:


Supply/demand economics will create a bottom in the housing market once 2 million homes
for sale are removed. Prices will start to increase.

Local governments will see a bottom in declining values and revenue will increase as values
slowly stabilize and slowly increase.

Individual homeowners as well as other sellers will find a housing market ready and able
to absorb the inventory.

Banks will now have a fresh source of funds to lend on homes that are not declining in value.

Banks will be able to clean balance sheets of hard to liquidate assets.

Lending/leverage/credi... markets will slowly begin to return to normal. Applications will
increase, appraisals, home inspections, title work, all types of stimulating activity for business.

As home prices stabilize and increase the local HUD agency selling homes over a 3-7 year time
frame will see prices rise for properties purchased by the RTC. HUD will only be required to
return to RTC the original amount of the purchase price plus the 20%. Or the original amount of the
selling banks first mortgage.

Once the RTC is closed and all homes sold, all losses (if any) will be covered proportionately
by the selling institutions. All financial Institutions selling homes to the RTC will share the loss
at the RTC as a percentage of total homes purchased and homes sold to the RTC. That percentage
will be the Banks percentage for covered losses. These losses will be paid by the banks over a 30 year period liquidating the original bonds sold to finance the purchase.

Other agenda items:

Mark to Market accounting will only apply to non performing assets

Feb 20 11:44 AM

[a. palmer jr.:]

Most of the "normal" people should know what they can afford and what they can't. I certainly know that I have no place in a $1million dollar house. I think there are already laws on the books for people who default on loans, so why not just enforce those? There are also laws pertaining to fraud and predatory lending. If any of these laws are shown to be broken in house lending why not enforce these?
We certainly don't need the President and Congress rewriting our lending laws when the ones we have work fine (when enforced)

Feb 20 11:56 AM

[sheridan:]

You have to let people and instituations and companies fail!!!!!
Take the pain now because it's only going to get worse when you put band aids on cancer patients as Obama is doing.
We don't need stimulous we need to take our medicine even though it may hurt like hell for a number of years.
My kids currently owe $485,000 each in gov't debt- how about yours?

Feb 20 12:49 PM

[JohnL:]

"Not sure where the Constitution factors in to this."
I would have thought it factors into any policy action of this importance and expense.

"The government spends money for the general good."
Well this is the crux of the issue.

The central goal of our Constitution is to limit the powers of government to their absolute minimum. We know this from the extensive writings of the founders, expressed before, during and after its adoption. The goal was primarily expressed in Article 1, Section 8 which enumerates the 17 specific powers granted to Congress. And in case there was any doubt, the concept was reinforced by the 10th amendment which states: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

There was consistent recognition during the first 140 years of the republic that congressional authority to tax and spend was limited to the powers enumerated in Article 1 Section 8. This was expressed clearly by, among others, Jefferson, Hamilton, Madison, Monroe and Tyler. The "general welfare" clause does not expand those enumerated powers.

Then, in the 1930s, the Supreme Court made a number of rulings that turned this idea on its head. However, those rulings and all of the tax-and-spend laws passed ever since don't establish new legal precedent. They are simply unconstitutional and need to be overturned.

"I surely didn't want my tax dollars going towards attacks on Afghanistan or Iraq. Nor do I want my tax dollars being used to save the 'rubber tip arrow' enterprises, or Alaska's bridge to nowhere."
I surely didn't want my money spent on any of those things either; that's kind of my point.

"The problem is we live in a country with a representative government and we all have to not only hope for the good, but accept what we consider to be the bad."
We also live in a republic, in which the government's powers are constrained by the Constitution to prevent the very spending to which we both object. That document prevents the self-interest of a majority from being used to trample the (property) rights of a minority.

"Welcome to America!"
Hmm...I've been here for about 50 years, but thanks for the welcome anyway.

Feb 26 06:33 PM