President Obama’s Housing Plan

There is an old saying among experienced economic policymakers, “in a major crisis, do not err on the side of being insufficiently bold.”  And we know that President Obama’s economic team are avowed proponents of this approach.The housing plan unveiled yesterday is impressively comprehensive – I go through some of the details in a post this morning on The New Republic’s Site.  But is it bold enough?

The parts dealing with conforming mortgages, thus involving Fannie and Freddie, are very much in line with what we have been advocating – these organizations now work for the government, so put them to work.  The scale of this piece seems roughly appropriate.

The Administration feels it cannot currently approach Congress for more funding, and this is presumably why there is so little funding in the remainder of the housing plan – and, remember, we know that many modified mortgages will later default again.  If this assessment on the lack of funding is correct – and I’m not convinced – at the very least it suggests the Fiscal First strategy was not such a great idea.

And this has implications for next steps.  If you think there is even a moderate chance of needing more funding down the road, wouldn’t it be better to start a serious conversation now with Congress?  In particular, a more holistic approach – with banking and housing included – is surely the right way to frame that interaction.

Originally published at the Baseline Scenario and reproduced here with the author’s permission.

One Response to "President Obama’s Housing Plan"

  1. TA   February 20, 2009 at 4:06 pm

    Simon,Perhaps the best place to begin “a serious conversation” concerning the housing crisis is to consider the new administration’s housing goals. It would be helpful if you could elaborate on their goals, policies and programs and how they are affected by the housing and economic crisises.With respect to the “Homeowner Affordability and Stability Plan”, it seems terribly wasteful and misguided to structure a multi-billion dollar policy promoting mortgage affordability. The gimmickry used to determine eligibility is akin to that used by the previous administration’s programs, and as a consequence, is likely to render it equally ineffective. What a shameful waste of resources.The only viable solution to ending the housing and economic crisises is the elimination (not partition or set-aside) of “negative equity”. Lenders won’t voluntarily incur a “short sale” loss and sellers can’t incur the loss due to insufficient funds (discretionary, savings, retirement). As a consequence of this little understood phenomenon (i.e. “short sale” loss), lenders won’t issue sellers a mortgage release thereby locking up real estate markets throughout the country, while home prices continue to plummet.The new administration’s Plan provides legislation empowering bankruptcy judges to eliminate “negative equity” by “cramming down” the mortgage principal balance to the home’s current market value. The lender would incur the full loss, and as one can imagine, the Mortgage Bankers Association adamantly opposes the legislation (see the MBA “Stop the Bankruptcy Cram Down Resource Center”).However homeowners must file for bankruptcy protection before seeking “negative equity” relief. Most homeowners have not and are not in danger of defaulting on their mortgage and therefore have no need for bankruptcy protection. Their real need is to shed the difference between the current balance of their “bubble era mortgage” and their home’s “post-bubble market value” (i.e. “negative equity”).The crisises will not abate and a recovery will not begin without first discharging the debt overhang of banks and households. What’s needed is a federally sponsored program to reduce bubble era principal balances. Unfortunately the administration is promoting a misguided program focused on mortgage affordability.