How Obama's Housing Plan Works

I did something last night I should never do: get on the internet after midnight.  It's an immediate downward spiral reading angry comments threads into the wee hours of the morning.  But I got up this morning and went through the Obama Administration's Homeowner Affordability and Stability Plan and looked at some of the analysis of it and this is what I've got:

As described, it is an attempt to stabilize the housing market by a) putting in place long overdue basic regulations, b) expanding the reach of government subsidies and guarantees for homeowners, and c) helping those most acutely in need as quickly as possible.  It's biggest weaknesses, as many have pointed out, is that a) banks and mortgage lenders participation is not mandatory, b) there is a small but key need for Congressional legislation around bankruptcy law, and c) it assumes the majority of us 10-15M "underwater" homeowners will not walk off and leave our properties behind.  That is, it requires widespread, good faith participation from all involved, and it's an awfully fearful and resentful time to rely on such goodwill, frankly.  Seems to me one of the things Obama needs to do to make this work is to be delivering weekly reassurances and public shamings on prime time television to pull this off, because the country still believes in him even as the majority would like to fire the bankers and Congress if we could.

The details of the plan are after the jump.

The plan does three things:

1) It makes up to 5M current homeowners newly eligible for low-cost refinancing on owner-occupied homes where they owe anywhere from 80% to 105% of the home's value.  (Under current guidelines we are not eligible for refinancing.)  Homeowners' mortgages currently must be guaranteed by Fannie Mae or Freddie Mac (which I believe you can confirm by calling your lender).  The Administration estimates homeowners could save up to $2,300 per year, or just under $200 per month in mortgage payments.

2) This refinancing effort is possible in part because the Administration plans to put more cash into Fannie and Freddie, expanding the Treasury's original holding from $100M to $200M in each agency.  It also will expand the mortgage portfolio each agency is allowed to hold - from $50M to $900M.  It will also - and this is vague, so they are surely still working this part out - strengthen the intermediary role of state housing finance agencies to work with homeowners in the 50 states.

3) Finally, $75B has been set aside to help up to 4M of the 3-6M homeowners who live in their homes and are at risk for or facing foreclosure (i.e., they are already behind on their mortgage payments).  Like the effort to rely on HFAs mentioned above, this step also turns to our existing affordable housing infrastructure for execution.  HUD mandates that affordable housing means people don't pay more than 30% of their income towards housing costs, be it rent or a mortgage.  Obama's plan here is to work with the banks to reduce homeowners' mortgage payments to no more than 31% of their after-tax income.  This is where bank participation is needed but not mandated.  Eek.  The Administration is proposing is to offer a series of financial incentives to servicers and lenders to entice them to lower interest rates and stretch out loan terms to get mortgages to within 38% of homeowners' after-tax income (ATI).  Lower interest rates are good for 5 years.

Then the government will split 50/50 with banks the loss the banks will take to reduce the mortgage by another 7% to get the total payment to 31% of ATI.  Basically, they want the lenders to reduce the total principle and the government will eat 50% of that loss.  What Obama is banking on is that this will ultimately cost the banks less than foreclosure proceedings.

Included in this effort is developing and implementing loan modification guidelines to be used industry-wide.  Furthermore, if banks want more bailout funds (Geithner's plan), they must implement loan modification plans that meet these guidelines.  This is probably the strongest incentive, assuming the banks are still at Obama's doorstep, hats in hand.

Lastly, the Administration wants to allow mortgage cram-downs in bankruptcy court for homeowners who don't qualify for this program - this requires Congressional legislation.  Good luck with that.  There is also $1.5 B set aside for displaced renters - nice! - and $2B for neighborhood stabilization - great!

And there you have it - I'll be back later this afternoon with some analysis of this plan.

Photo by woodleywonderworks.  It makes me think: Will Obama's gamble pay off? Are we all in on this housing plan?