Obama's Housing Plan - A Turning Point?

My last couple of posts have dealt with what I feel is needed for the economy to turn the corner and start the path to recovery. Although I didn't initially intend to start a series of posts on economic recovery, I think that with the recent flow of news coming out of Washington and Wall St. it's appropriate to continue this series with at least one more post.


One of the key points that I've continually advocated that needs to occur for an economic recovery is stabilization of housing prices. This basic phenomenon is what I feel will impact other key areas of the markets and allow the economy to recover. Earlier this week, Pres. Obama announced a $75 billion dollar plan to help troubled homeowners with their mortgages and avoiding foreclosures. Although stabilizing housing prices is not a stated goal of the plan (it's more to help troubled borrowers), I do feel that this plan is a good first step in that direction.


What Does the Plan Do?

Let's take a high level look at the highlights of the plan:

1. Refinancing Requirements - The plan will change the requirements to refinance a home to make it easier for homeowners to refinance to today's extremely low rates. Generally, a homeowner' s mortgage must be less than 80% of the home's overall current equity in order to qualify for refinancing. However, due to the severe drop in home prices, many homeowners now owe greater than 80% of the home's current value through their mortgage. With this plan, the 80% requirement is increased to approx 105% - as long as the homeowner is current on their mortgage payments and the loan is conforming (i.e. securitized by Fannie or Freddie). This means that even if your mortgage is worth more than your home and you've been able to make your payments, you are eligible to refinance your home.
2. At Risk Homeowner Initiative - The meat of the plan really is in the stability program for at-risk homeowners. This $75 billion dollar plan is aimed to help homeowners whose mortgage payments are an excessively large percentage of their income - either due to monthly payments that have increased due to adjustable rate mortgages, or loss of income due to a layoff, injury, etc. In this plan, the borrower would work with the lender to modify the mortgage in order to reduce monthly payments to at most 38% of the borrowers monthly income. The government will then step in and subsidize the mortgage in order to reduce the payments further to 31% of income. One thing to note is that this plan is strictly voluntary for the lender and they do not have to participate. However, if they do, then the government will pay the lender $1,000 per modified loan, plus another $1,000 per year for three years if the borrower stays current on the loan. Plus, if the borrower stays current on the loan, he/she will get $1,000 in tax incentives per year for 5 years.
3. Fannie/Freddie Strengthening - Finally, the plan also provides financial assistance of $200 Billion dollars to both Fannie Mae and Freddie Mac - the government agencies that help subsidize mortgages, thereby allowing for lower interest rates. This will help provide stability to the troubled organizations allowing them to continue supporting the US housing market.

My Thoughts on the Plan

I really feel that this plan is an excellent first step in the economic recovery process. As I've repeatedly stated, housing price stabilization is the key component in the economic recovery process. This plan is the first significant and detailed step towards creating this stability. With that said, however, I think there are some significant gaps in the plans themselves. There's always the obvious question as to whether the government should be stepping in and artificially supporting the markets as it is in this case, especially this late in the process. There's no doubt this is an expensive plan (although most of it will be paid through the existing TARP funds). But at this point, in order to stop the bleeding in the economy, the government needs to backstop the slide and provide a clear message in order to restore confidence. I think this plan is a good step in that direction.

Another glaring weakness in the plan is there is no provision for the government to get its money back if the market recovers. If in the next few years, housing prices recover and homeowners end up profiting from the plan more than expected, the government will not be able to reap any of those rewards.

Finally, another gap in the plan is that many homeowners that are current on their mortgages and are not distressed borrowers will not get any sort of aid in the plan. In a sense of fairness, I believe that incentives should have been placed for these types of owners to be able to refinance their mortgages at a lower cost. Otherwise, this plan reeks of welfare to those that were either irresponsible borrowers, are had misfortune in their lives (there's no distinction in this plan for those types).


All in all, if this plan is successful, I think we'll see a quicker stabilization of housing prices than we would have seen without it. The plan is supposed to get rolling by March 4th, so I hope to see significant participation by this summer. On a macro lever, this will hopefully result in housing prices beginning to stabilize by the end of summer or early fall with a resulting significant recovery in the markets by the end of the year.


Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.