I’m disappointed in the Obama administration’s plan to help troubled homeowners. The details were announced yesterday. I expected a more creative plan because it seems quite clear that stopping the foreclosures and stabilizing housing values are among the most vital ingredients for getting the economy on the road to recovery. The Obama plan will help, but I fear it won’t be enough to make the dramatic difference that’s needed right now. It does too little, not too much.
The problem is that while it focuses on reducing interest payments, which is good, it has no mechanism for actually readjusting the value of the home for which the payments are made. Our economic crisis was triggered by the convergence of ill-conceived loans and the precipitous drop in home value when the housing bubble burst. Suddenly, homebuyers were making payments on something worth far less than their total mortgage would indicate. Simultaneous with much of their personal net worth evaporating, interest payments readjusted upward, still reflecting the previous bubble value, but also leaving behind the original, deceptively low interest rate. So, struggling homebuyers are faced with two problems: high payments camouflaged in the sub-prime loan swindle and highly inflated loan values caused by market madness.
By only addressing one side of the problem, I don’t think enough homeowners will have the necessary incentive to continue making their payments. While the Obama plan will allow a large group of them to pay less per month, in the long run, they will still be buying something worth less than its ultimate cost. Despite the better interest rate offered in Obama’s plan, I think many people will find that continuing to pay while that disparity remains will be too discouraging, if not foolish.
In my earlier post, in which I proposed a simplified plan, I suggested that payments be reduced to one-third of income, and that the time period for the loan be extended beyond thirty years. This strategy is very similar to the Obama administration’s “Plan 2.” I too suggested a readjustment after five years, as does the Obama plan, but not of the interest rate specifically, but rather to a market-corrected loan value based on an appraisal to be done at the later date. By then, the appraisals should be neither inflated nor deflated by the skewed conditions of either the past bubble or the current recession.
In my proposal, I thought it would be best to reserve the housing recovery money to pay the difference on the loan values five years from now, helping both the lenders and borrowers in a fair manner. In the meantime, the payments would be more affordable and the homebuyers would have an assurance that ultimately their home would be correctly valued. The catch, of course, is that the homebuyers would have to remain in their homes and make the payments in order to eventually benefit in a real monetary way from government support. They’d have to give to get.
I’m sure there are complications to the solution my simple mind could conjure, but I had only myself alone in the shower, not a gathering of the nation’s top economists, with all the data and statistics at hand. I wish those guys had been bolder and more imaginative. The plan that will silence all the naysayers is the one that will work. This one doesn’t make me optimistic.
But I hope I’m very wrong.