Hot off yesterday's signing of The American Reinvestment and Recovery Act, President Barack Obama has announced his new mortgage-bailout bill:
"I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans," Obama said. "It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone."
The effort would help borrowers—both those current and delinquent—who live in their homes lower their monthly payments for five years. The servicer would reduce interest rates so that the monthly obligation is no more than 38% of a borrower's income and then the government would kick in money to bring payments down to 31% of the homeowner's income….
The Obama plan calls for legal changes to allow judges to modify mortgages during bankruptcy. Judges would be allowed to reduce the loan balance, a measure the financial industry fears because it would lower the value of the mortgage.
Despite the relatively puny ticket price ($75 billion just doesn't seem so big anymore, does it?), allowing judges to reduce loan balances is a huge departure from past practice and it's far from clear exactly how the new mortgages can or will be valued. And of course, there's a bunch of zeroes still waiting to be tacked onto the whole plan, which includes expansions of Fannie Mae and Freddie Mac, and the feds buying a bunch of new mortgage-backed securities as well. The plan, which lenders and borrowers can join voluntarily, also allows the government to set many terms, from maximum payments to mandatory credit counseling and the like.
Obama's speech was big on responsibility rhetoric. Only those deserving to be bailed out will be (and for all of us who lived within our means, well, thanks). I am genuinely puzzled by that rhetoric and the logic of the plan: Everyone agrees that housing prices were inflated but the way out of this thicket is to keep them high but have people pay less for them…until such time when everything is OK again.
I would much prefer a plan that would help people who are screwed via unemployment benefits and that sort of aid, and would allow markets to work through the pricing of assets and real estate. It's less heroic, to be sure, but it would have the benefit of actually allowing price signals to operate, which strikes me as about 10,000 times more preferable than what we're looking at here.