Thursday, February 19, 2009

The Homeowner Affordability and Stability Plan

Ok, so the Obama Administration released their housing bailout. Check out the details here. The White House also published a good list of FAQ's here. I'll ignore the fact that the title of the plan (which is the title of this post) is pretty bizarre, in that any plan which aims to keep home prices from falling by definition makes them less affordable for those looking to buy homes.

So the plan has a few parts. The first part deals with people who want to refinance into a lower interest rate, but are unable to do so because it's almost impossible to refinance if you owe more than 80% of your home's value. The Plan ups this ratio to 105% - those who owe up to 105% of their homes value will be eligible to refinance into new, lower rate fixed rate mortgages. There are some examples illustrated here.

This is good - allowing people to refinance into a more reasonable interest rate is a fine goal.

The second part of the plan is basically aimed at incentivizing "at risk" borrowers and lenders to avoid foreclosure. In other words, if there are borrowers who are borderline foreclosure candidates, the government is offering to share part of the burden with the lender if the lender aims to restructure the loan so that the borrower has a less burdensome monthly payment. The government set 31% of monthly income as the goal for maximum mortgage payments. Although, according to the example worksheet I linked above, the outstanding principal balance of the loan will not change, the government will subsidize the interest rate to a below market rate to achieve the lower monthly payment.

In addition, the government offers incentives to both the borrower and the lender to remain current on the mortgage - $1k reduction in principal for the borrower for every year (up to 5 years) they remain current, and $1k per year (for 3 years) to the lender for enabling borrowers to remain current! Finally, they offer $500 incentives to mortgage servicers and $1500 incentive to mortgage holders who modify mortgages before they become delinquent. Again, they are disualifying those borrowers who own more than 105% of the value of their home.

Now, this part of the plan is a little dicier. Instead of looking at it as the absolutely absurd idea of both subsidizing and paying people to pay their mortgages, which goes against every value I have, I believe the goal is to reach a better outcome for all parties involved (lender, borrower, other homeowners in the neighborhood) who would do worse if the lender went through with foreclosure (which is expensive for the lender, obviously not good for the borrower, and lowers surrounding home values.)

The final part of the plan is more money dumped into Fannie Mae and Freddie Mac to continue to buy mortgages, as well as an increase in the maximum allowable size of their portfolios. I'll just ignore this part of the plan, since there's no use complaining about how we were supposed to be winding down FNM and FRE's heft, not increasing it - as was stated when the government bailed THEM out.

Now, one reason I'm not outraged as a fiscally conservative free markets American is that I don't think this plan is egregious. Unfortunately, because it's not egregious I don't believe it will be transformational. At best, the plan will allow borderline foreclosure cases to restructure into mortgages they will be able to pay off. At worst, it will delay their foreclosures for a few years. What it won't do, I PRAY, is bail out the morons who have no hope of paying back their debts.

Obama is not an idiot. He knows he cannot and should not bail out everyone. Unfortunately, I think there are a lot more people in the "shouldn't and cannot be bailed out" category than the President estimates, and that this housing plan will be like a finger in the dike (the retaining wall kind, not the lesbian kind).

I have thoroughly enjoyed reading the comments from NY Times readers on the Housing Plan. When there is so much outrage from an audience as supremely liberal as the Times', you know The People are getting mad. The link to the comments is sorted by ones which NY Times readers most approved of. I strongly agree with the sentiment of many of the comments, which basically revolves around the common theme of "Why are we rewarding fiscal irresponsibility?" My two most liberal colleagues continue to argue with me that we need to bail out these at risk homeowners because we cannot allow the housing market to just collapse and face armageddon in our society. I strongly disagree with this notion of homeowners being essentially "too big to fail." Millions of Americans were given a taste of a life they could never afford as a result of a bubble of massive proportions. Now they will need to go back to the life they had before they were given $700k houses on $50k incomes. It can be undone, and there are millions of other families waiting to buy these houses when they are allowed to be priced at normal market prices.

Part of the problem is that my friends don't sympathize with me because they know I'm still well off, even if I'm getting raped on my massive rent each month because I was responsible and didn't buy an apartment at the top of the market. Even though it's unfortunate that my wife and I will probably leave NYC shortly because this cost of living is ridiculous, I still have options.

I explained to these liberal friends that they shouldn't think about me - they should think about my sister and her husband, who are both teachers living (renting) in suburban Boston. How will my sister be able to afford a home if the government acts to inflate home prices artificially (and I dare anyone to explain to me how any sort of government subsidy can be viewed as anything other than artificially keeping home prices higher.) My step-sister also lives (rents) outside of Boston. Her husband drives to Providence before dawn every morning to work a temp job to earn money for the business he is working on developing. How can they ever hope to afford a house if the government is attempting to keep home prices higher - rewarding those who took on mortgages they couldn't afford?

I tried to explain to my bleeding heart liberal friends that by helping one (imprudent) family, the irresponsible borrower family, the government is hurting another (prudent) family - the "saving and waiting for AFFORDABLE housing" family. It's quite clear to me which way that scale should tip.

I leave you first with a NY Times comment from "Jessica in Brooklyn," which I think illustrates my point:
In other news, I am barely making enough to pay my student loans, rent, food, insurance and save for a down payment. To me, mortgage is a privilege. Nobody is helping folks pay their rent, so why should we spend so much money to help those who purchased too much house. I don't want to see families become homeless, but this all very frustrating for someone who is trying to purchase a home the right way. Hey Obama, I didn't get a good return on my law school education. Can you help me out with my bills?
and then with today's outburst from CNBC's Rick Santelli, who is one of the most reasonable and well informed reporters they have. This was immediately dubbed "The Chicago Tea Party."



Anonymous said...

Yesterday, particularly after seeing Rick Santelli's outburst regarding the housing plan, I wondered if I was wrong to be feeling relieved that the housing plan sounded somewhat reasonable. Glad to see that you also feel it isn't outrageous. I agree, this plan won't have a huge impact and it might help out a few people who people who are borderline.

I work for a housing finance agency which is a quasi state agency. Quasi, meaning it is mostly self sufficient (sell municipal bonds to raise capitol- we are allocated volume cap and we also sell taxable bonds so that we can lend more $ at a blended rate). During the "housing boom", the agency resisted putting out overly risky products, and as a result we seem to be weathering the storm at the moment. Anyway, last year we were asked by the state to come up with a plan to "rescue homeowners", and the resultig plan resembles parts one and two of Obama's plan on a smaller scale. This rescue product allows a borrower to refinance the loan up to 105% of the home value, if they meet certain standards. Under the rescue product, if the homeowner owes more than 105% of the home's value, we ask that the lender take a loss to avoid the foreclosure process.

Much to the state's chagrin, the plan hasn't helped very many borrowers. There just don't seem to be as many people who are at the margin of being able to afford their mortgage, or maybe if they are marginal, the lender will re-work the loan themselves. But personally, I don't think we should be helping more people. The policy makers keep saying we need to "keep people in their homes", but the goal should be to keep people housed, not necessarily in their own home.

My husband and bought a home outside of Boston two years ago, on which we put down a sizeable down payment. My biggest worry is that if we want to move and sell our house, we will not come away with enough for a down payment on another house (most of the money we used for the down payment had been invested in the stock market, so the loss might be a wash). I have a vested stake in seeing the housing market stabilize, but rationally I'd know it is best for prices to come to a natural level.

Love the Blog!

Jeff said...
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