Wednesday, October 08, 2008

How much hope do homeowners need? 

So most people are slamming John McCain's plan last night that would have government spend $300 billion to replace bad mortgages held by people who are underwater with good mortgages. The rationale is to save families that we might think did the right thing but lost money on a house anyway.
America�s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they�ve already suffered.
There has been since December a plan that asks lenders and borrowers to get together and renegotiate mortgages. A newer plan (described Monday in the LA Times) already has such a provision in place.
A new federal loan workout program called Hope for Homeowners (HfH) begins this month, targeting those unable to pay their mortgages. It is for homeowners who bought their homes before 2008 and now have monthly payments exceeding 31% of their income.

Under the program, banks would in many cases write down mortgages to 90% of a home's current value. Such a provision would be important in California, where many recent home buyers have mortgages that now greatly exceed their property values.

The new 30-year fixed-rate loan would be insured by the Federal Housing Administration and could not exceed $550,440.
This was passed last week in the bailout bill (see page 69, Sec. 124). And I understand that Section to have been introduced by Sen. Dodd. He pitched it in March. I think this is what Ed Morrissey (whose boss is one of the people slamming McCain) was referring to initially in his post (I now see he has updated and included the HfH plan.) And the McCain page refers to the bill as part of the powers it would have to create the Resurgence Plan. Ed also mentions a post by Marc Ambinder in which the McCain campaign says this money comes out of the $700 billion in the plan. It would be a redirection of the money, not a new cost. That was certainly not clear last night (not that much of this plan really was before I sat and read the email that had the plan I'm quoting here.)

Also worth noting are the conditionalities on the plan:
The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.

The McCain resurgence plan would be available to mortgage holders that:
  • Live in the home (primary residence only)

  • Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).
Note that there is no mention of the 31% payment-to-income ratio from HfH, so to me it doesn't look really like the same plan. So buyers of homes with stated-income loans would be out (like this fellow) or people flipping properties.

There's a glut of homes on the market. A glut is reduced either by decreasing supply or increasing demand. Lee Ohanian tries to sell an increased in skilled immigrants as a way to increase demand. The McCain Resurgence Plan, at its base, tries to reduce supply by not forcing the sale of homes through foreclosures. It might be, might be, cheaper to throw a few dollars into homes directly than to support the banks through the purchase of MBSs. From the Plan:
The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of �negative equity� in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.
The relief of negative equity means that the banks would receive from the government the difference between the principal on the original mortgage and the mortgage "at terms manageable for the homeowner." I still need some flesh on that. I would want to know if the 31% payment-to-income ratio is the definition of manageable. I'd want to know if the government can be certain the initial purchase price on the home was not set in order to qualify someone for a shady mortgage. Those details aren't there, and don't look in Marty Feldstein's pitch from last Friday (which is not exactly the same proposal anyway, but a close cousin.)

I'll see if my contacts in the McCain campaign will provide any additional details.

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