President Obama just spoke in Arizona to officially announce his plan to stabalize the housing market. Based on his remarks, it’s pretty clear that he will use the same basic playbook to sell the new plan as he did to sell the stimulus package. In other words, explain that we’re in the midst of a significant crisis that will only be made worse if we don’t do what he says.
“In the end all of us are paying a price for this home mortgage crisis and all of us will pay an even steeper price if we allow this crisis to continue to deepen,” Obama said. “But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit.”
The plan will be comprised of several parts.
The first part will allow Fannie Mae and Freddie Mac to refinance so-called “underwater” mortgages in cases in which the value of a home has declined below the value of the mortgage.
The second part will encourage mortgage lenders to reduce interest rates on subprime mortgages by requiring those institutions requesting government assistance to do so, and the federal government –i.e. taxpayers — will subsidize the gap between the old interest rate and the new, lower, one.
The third part would use up to $200 billion of existing Treasury funds to purchase mortgage backed securities from Fannie and Freddie so that they can help lower mortgage rates for new borrowers.
In addition, the plan would alter bankruptcy rules so that judges can allow mortgages to be renegotiated based on “fair market value.”
Obama didn’t mention the price tag in his speech, but the cost has been pegged at $75 billion (excluding the $200 billion) in Treasury capital.
The problem is that we got into this mess as a result of housing values that were artificially higher due to actions on the part of federal government, mortgage lenders, and borrowers. The only way to truly recover from this mess is to break the habit, and allow housing values to crash to a level that would entice those who sat on the sidelines while housing values skyrocketed to enter the housing market. That would be a long and painful process, but a necessary one. What the Obama plan does is repeat the same mistakes that got us into this mess — by using government subsidies and Fannie and Freddie to prop up housing values and artificially lower mortgage rates.
Furthermore, Obama suggests that he can bailout deserving homeowners while avoiding helping those who do not deserve it.
“I also want to be very clear about what this plan will not do,” Obama said. “It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.”
However, by providing subsidies to subprime homeowners who can’t afford their mortgage payments and putting more money at risk with Fannie and Freddie, by definition, he’s thowing taxpayer money after bad loans. In addition to homeowners, mortgage lenders –some of them the unscrupulous ones — will benefit if less of their bad loans default if the Obama plan works as intended. Any plan that props up housing values will benefit speculators who bet on the prices going up. And furthermore, how does the government determine which homeowners “knew from the beginning” that they would not be able to afford their homes?