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I e-mailed David Abromowitz, an expert in housing policy at the Center for American Progress, to get a very preliminary reaction to the administration's plan to prevent foreclosures. Noting that this is a very complex plan and that the devil, as always, is in the details, Abromowitz offers this first reaction to the administration's principles:
The Obama plan is a welcome change of course from the last few years, on 3 counts: The plan clearly places foreclosure prevention at the forefront of the overall economic recovery battle. Rather than hoping the modifications might occur as a benefit that would somehow flow from pumping more funds into banks, the plan plainly recognizes the basic facts: If over 10 million more families face the loss of their homes, then surrounding neighborhoods with 5 or 10 times that many families are all cutting back spending and shrinking the economy rapidly. What companies will be borrowing and expanding to sell more products if consumers are still scrimping, cutting costs and staying home? Contrast this plan with, for example, the recent conservative rhetoric during the stimulus debate acknowledging that foreclosures and vacant homes are the problem, but then proposing to reduce everyone's' mortgage rate to 4% regardless of whether they need it or not. This plan instead is targeted to where we most need to focus our efforts.Also, by endorsing a bankruptcy change benefiting homeowners who owe more than their house is worth, they are signaling that lenders will no longer be able to simply try to wait out the problem or march forward with a foreclosure. This should help motivate modifications, in addition to the specific cash incentives for servicers and mortgage investors in the proposal.And for the first time, by directly spending an estimated $75 billion on efforts crafted to accelerate widespread loan modifications, the Executive Branch is allocating major funding for the benefit of homeowners.I think Abromowitz is particularly right about the incentives to motivate modifications: the key to this plan is getting mortgage holders and servicers out of their game theory-style security dilemma, where waiting out the crisis may be good for an individual lender but bad for the housing market and economy overall. The plan can't be a bribe for the lending industry -- hence the support for allowing bankruptcy judges to modify mortgages -- but it can grease the wheels to get loan mods rolling.
-- Tim Fernholz
