Housing Plan: Mitigation Through Modification

Barack Obama has released his plan for dealing with the housing crisis at FinancialStability.gov and in a speech in Phoenix. It's not a moment too soon - housing starts are at a record low, and the glut of foreclosures threatens to crash property values, bankrupt the financial institutions who relied on mortgage sales and therefore sink the economy. So clearly we need relief.

What is foremost in the plan is keeping people in their homes, which is vital, because each foreclosure costs the economy about $250,000. The executive summary of the plan explains how the White House will seek this goal:

The Homeowner Affordability and Stability Plan is part of the President’s broad, comprehensive strategy to get the economy back on track. The plan will help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. In doing so, the plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too, as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs. The key components of the Homeowner Affordability and Stability Plan are:

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

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

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

While I don't think low mortgage rates should really be a goal, on balance this is a good idea. Using Sheila Bair's FDIC loan modification plan as a template, it lets Fannie and Freddie refinance mortgages for at-risk borrowers at rates they can afford, and then encourages lenders to do the same through various incentives. The good framing here is that every homeowner will get a boost from this because their property values will rise. This blunts the expected rebuttal that the plan rewards bad decisions. And to be sure, conservatives will be screaming about that, even though they were demanding that something be done just a few days ago as a way to reject the stimulus. Now they'll reject the housing plan. They are rejectionists.

The plan will not aid speculators or house flippers. And it retains the option of allowing bankruptcy judges to modify mortgages in their courts, or "cram-down." This is the stick that lines up with the carrot for lenders to make the modifications themselves.

Remember that hackneyed talk about "a bailout for Main Street" as opposed to Wall Street? I have to say that this looks like exactly that. As David Leonhardt explains.

In coming weeks, his administration will begin spending $50 billion to entice banks to reduce the monthly payments of people who otherwise couldn’t afford to stay in their houses. In effect, the government will split the losses on these mortgages with banks [...]

There are some big advantages to this approach. Bailing out all underwater homeowners would be tremendously expensive. All told, about $500 billion in mortgage debt is already underwater, and it’s impossible to know in advance who is likely to walk away. So the government would have to spend hundreds of billions of dollars to help millions of people who don’t need help staying in their homes.

Leonhardt is worried about the consequences of the homeowners who are "underwater" (they owe more on the home than what it's worth) walking away from their homes, which would cause foreclosure rates to skyrocket. It is a concern, but if communities can be preserved through mitigation of the most troubled homeowners, this could stabilize values and maybe even bring some houses back above water. I don't think the government should be re-inflating the housing bubble. So this seems like the best approach.

And if you combine this inside game with the increasingly successful outside game being played by community activist groups like ACORN, who are supporting families who refuse to leave their homes, and you see a situation where the banks are really unable to do anything but rewrite terms. That's going to cause some stability for millions of people. You'll still see foreclosures because of unemployment, but they will be manageable. That's the promise of this policy.

Susan Ozawa has more.