Saturday, April 11, 2009

Housing Plan Critique

In some ways the housing plan is a no-win situation - at least for the critics. Even if the program relieves some of the housing problems there will be people that should not be getting help that are able to. And of course there will be people who should qualify but for some reason do not get any. Today the Washington Post article titled Plan to Help Borrowers Is Too Narrow-Minded complains that the program is too small and too narrow in its focus. Lets take a look -

The limited scope of the program is why its cost is estimated at only $75 billion, or less than the amount required to bail out AIG. The impact will be correspondingly small.

The major limitation of the program is that it does not attack the problem of negative equity -- mortgage balances larger than the value of the homes securing the mortgages. Large and growing negative equity underlies the sharply reduced
values of mortgages and mortgage-related assets on the books of the financial institutions holding them. These reductions in asset values have eroded the capital of these institutions, which the government has had to replenish to prevent failures.

The new program is focused on the capacity of borrowers to make their monthly payments. Indeed, this is evident from the program name, Making Home Affordable. The major tool for reducing the payment is rate reduction, with balance reductions only a last resort in cases in which rate reduction and term extension can't get the payment low enough to be affordable.

In the minds of the program's designers, having negative equity is not an indicator of whether help is deserved. True, most negative equity has arisen from broad price declines affecting entire markets, but borrowers are not altogether blameless. They could have made larger down payments when they bought the house, and they certainly did not have to take out that second mortgage that allowed them to live (temporarily) beyond their means.

This same mindset is evident in the rule, incorporated in both programs, that only owner-occupants are eligible. Investors -- those who rent their properties rather than live there -- are not eligible. In this mindset, investors don't deserve help because they were implicated in the bubble that preceded the crash: They bought houses in the hope of turning a quick profit, and government should allow them to take their lumps without interference.

Well, lets hope the program works and perhaps eventually things can be altered or expanded. This is a probably a case where the perfect is the enemy of the good.


Bill said...

The modification program is not designed to bail out banks. The purpose is to allow homeowners stay in a house if their income is reduced.

It does help the bank because it cost them less to modify the loan than to foreclose since banks only recover from 25% to 50% on most foreclosures.

Bill said...

The program does not deal with HELOCs either.