Obama threads a mortgage needle
If his plan doesn't curb foreclosures soon, he'll need to be like FDR and try again.
In office 30 days and President Obama has already devised a stimulus package, a bank bailout, and now a mortgage rescue. Like Franklin D. Roosevelt, he has put government's shoulder into a falling economy. But also like FDR, he says he would end any program that doesn't work. For his mortgage scheme, he may want to keep his hand on the plug.
The $225-billion plan aims to help millions of homeowners either on the cliff of foreclosure or living in houses worth less than the mortgage. The real purpose, though, isn't a long-term social program but to put a floor under a housing market in a downward spiral.
If prices stabilize, then a value can be put on the bundles of mortgages held as securities by wobbly banks. Banks in turn will start lending again. The credit crunch will decrunch.
If lending and the economy revive in coming months, this taxpayer subsidy will be justified. Mr. Obama also claims the plan will keep all home values from sliding by $6,000 from current trends. If either promise doesn't hold up and the wave of foreclosures continues, the president needs to "do what works" and rethink his bailout.
At a practical level, the plan may be too limited or risky to arrest a housing slump that has yet to fall to its prebubble prices in most regions. For starters, it applies only to those living in their primary residences. About 40 percent of purchases during the bubble were by investors who aren't eligible for this bailout. And people with "jumbo loans" – generally in higher priced homes – also are not eligible.
It's also not clear yet if the plan applies to second mortgages – often done by different lenders – or to people who lied about their incomes in applying for a mortgage.
The plan is also largely voluntary on the part of banks and relies mainly on government handouts to encourage refinancing of troubled loans. This wisely honors the private contract that is a mortgage but there's no assurance banks will rush to save homeowners on the edge. Many banks may prefer to wait for interest rates to rise rather than take on low-rate mortgages. And recent refinancing done under government guidance has shown high rates of repeat defaults.
The only blunt tool Obama offers is to ask Congress to allow bankruptcy judges to readjust mortgages. But causing such uncertainty for banks would likely end up raising interest rates for all new homebuyers, hurting the market.
Perhaps for all these reasons, Obama is unable to offer an estimate on the number of foreclosures the plan will prevent. The plan also lacks permanent relief. Its low interest rates last only five years. By then those rates will go up. Even with a healthy economy, many homeowners may not be able to afford the higher rates.
Fundamentally this latest attempt to prop up "the American dream" of owning a home shows the difficulty of meddling in such a diverse and huge private market. The housing bubble was caused in large part by federal rules and subsidies that made it too easy for people to take on mortgages they shouldn't and for investors to believe prices would always rise under government's paternal eye.
To pull the plug on this rescue plan if it doesn't work would at least be a reminder that government can't always get it right.