Barbara Sard of the Center for Budget and Policy Priorities was kind enough to take my phone call even though she's on vacation. Here are her early thoughts on the principles outlined in the administration's housing plan (wonkiness follows):
The plan looks very good in a number of respects. Contrary to [David] Leonhardt's article in today's Times, it does aim to focus on both the underwater problem and sub-prime part.
Leonhardt's piece -- which despite being overtaken by events is still worth a read -- speculated that Obama would try to avoid dealing with mortgages that are "underwater," the situation that occurs when a homeowner owes more money on a loan than the real value of his or her house. While some of them can continue to make payments, they may be tempted to walk away from their homes and let them foreclose;.If that happens en masse it would be very problematic for the housing market -- its a ticking time bomb that may or may not go off. When Sard refers to the sub-prime part, she's talking about those people who can't afford their payments because of ballooning interest rates and will likely face foreclosure in any case.
It does the underwater part modestly, potentially by focusing on the mortgages that are already guaranteed by Fannie Mae or Freddie Mac … that's a very sensible way of slicing the problem where the government through their role in basically now owning Fannie and Freddie already carry some risk that those homeowners will walk away from their mortgages. By focusing on those mortgages and modifying the terms of refinancing, the federal government takes a little hit in terms of the ultimate amount of repayment on a mortgage, but probably takes less of a hit than if the homeowner walks away.
On the sub-prime piece ... Instead of focusing either only on people who are already behind on their mortgages or only on those who have kept up -- that was kind of a tension between Congress and the administration before -- it basically does both. You can be eligible for the write-down on your mortgages if you kept up and in some cases if you haven't. You have to see the details to know how they define the people who are eligible if they're already behind. [But] one real criticism of past efforts was that if you had to be behind in order to qualify for help, it became a perverse incentive to not pay your mortgage, so they're dealing with that by saying you can be either.
... It seems to me that they did some clever things in making lenders take part of the loss on the interest rate reduction, and then matching it, and dealing directly with the problems of servicers … they're basically paying servicers at the front-end to do the modification and then in an on-going basis if the homeowners stay in their homes. That is really smart because it creates an incentive for the servicers to write down the loans.
What about worries that this is a giveaway to lenders?
People owe the money. And [the administration] does indicate their support for the bankruptcy change. With the bankruptcy change you create the leverage, particularly for the homeowners who were really defrauded. [They] will have, if that's enacted, other means, at no cost to the taxpayer, to pressure for a cramdown on the loan. But in a lot of cases these weren't fraudulent and nobody's going to be able to prove it and that case by case dealing with things would be way to slow. They were dealing with some very practical problems given the extent of the volumes that they need to reach. You can't do this in a boutique, case-by-case method. Again, you might hear people say it's too much of a giveaway, and I think some of that is going to depend on the details, but it does seem to me that it's a more well-rounded approach to the problems than we've seen before.
Sard also noted that there doesn't seem to be any effort, at least in this plan, to prevent renters from being affected by foreclosure, although there is some money in the stimulus to help ease renters who have been already displaced.
Because all of these foreclosure prevention efforts are focused on owner-occupants, you still have this swath of homes that are owned by people who are renting them who apparently don't qualify for any of the help, at least according to the outline. Those foreclosures would presumably be unchanged. I understand why you don't invest public funds [in people who] have invested in property as a business, but that still means that we've got another segment of a problem here. ... To the extent that these other measures reduce the rate of decline in home values, investors may be willing to hang on as well. There are lots of people who own property in order to rent it out, and not all of them are dirty speculators. If you called them small businessmen, it would look like they were socially valuable and like we should help them.
-- Tim Fernholz
