Yesterday, I wrote that I thought the Obama housing plan is inadequate because it only proposes to lower interest rates and doesn’t address the larger issue of adjusting principal, or the actual value of the asset. I was gratified to see in the New York Times this morning that their editorial board agrees with me about the deficiency in the plan:
The idea is to lower the monthly payment on a loan by modifying its terms, which is the right goal. The problem lies in the way loans will be modified. Mr. Obama’s plan emphasizes lowering monthly payments by reducing a loan’s interest rate, which certainly will allow many people to stay in their homes, in the near term at least. What it won’t do is make staying there a wise move. And it’s not the best way to guard against re-default.
A better way to lower the monthly payments for these people is to reduce the principal remaining on the loan. That way, the payments become affordable and, as equity is rebuilt, the borrower has both an incentive and the means to keep current.
They didn’t describe the mechanism for adjusting the principal, but went on to say that the new bankruptcy law may allow judges to make the modification for those who must go that route. Still, for many others, a fair adjustment based on an appraisal a few years from now seems to me still a reasonable approach.
However it’s done, doing something more is VERY important, as emphasized in the NYT editorial:
The Obama plan will make mortgage indebtedness more manageable, but ultimately the debt itself needs to be greatly reduced. The sooner we as a nation move in that direction, the better.