Updated: March 4th – Housing Plan Details

Highlights from Obama’s $75 Billion Mortgage Relief Plan:

  • Allow refinancing of loans owned or securitized by Fannie Mae or Freddie Mac. This is for those who can’t qualify for a traditional refinance because they don’t have enough equity. This will allow a refinance of a loan up to 105% of the market value.
  • $75 billion “Homeowner Stability Initiative” – This is a loan modification program designed to reduce payments for people who are paying a high percentage of their income for mortgage payments. Lender reduces the rate to get down to 38% of income and government reduces it further to get payments down to 31% of income. Lender can also reduce principal to get payments down. Treasury shares in the cost. Loan servicers get $1000 per successful loan modification. There is also some kind of insurance program to insure lenders against further price declines.
  • Relocation assistance to renters displaced by foreclosures.
  • Allows cramdowns in bankruptcy.
  • Adds $100 billion to Fannie Mae and Freddie Mac over and above the $100 billion already committed.
  • Increases the size of Fannie and Freddie’s allowed mortgage portfolios.

My initial take is that this won’t accomplish much beyond the refinance of Fannie and Freddie backed loans. That isn’t insignificant but it leaves out a lot of mortgages. The loan modification program for non Fannie/Freddie loans will only be useful for loans still owned by banks. For any securitized loans, this would be very difficult to implement. The owners of the MBS’ would have to agree to any modification and ownership is too widely dispersed to get agreement. Allowing cramdowns in bankruptcy will raise the cost of mortgages in the future since lenders will have to factor in the likelihood of taking a haircut in bankruptcy court.

Increasing the size of Fannie and Freddie’s mortgage portfolios will be useful in taking loans off the banks balance sheets but I wouldn’t expect it to result in more loans. One wonders if we will ever be able to wind down Fannie and Freddie. I’m not even sure that is the goal; someone needs to eventually decide what to do with these institutions.

I’m not sure how effective these programs will be but at least they actually presented a plan in contrast with the Geithner debacle last week. The housing market will heal itself eventually with or without these programs and my guess is that this will just lengthen the time it takes for that to happen. In the meantime, the administration gets to say it is doing something while taxpayers pick up the tab – again.

There’s a Q&A available at Whitehouse.gov