It does seem like every law that is written or proposed relating to finance lately is really designed to help prop up banks. If only they could just, just get those house prices back up to where they were in 2005, then all the toxic assets would be good and everything would be all sunny again! Also, not only do the news media not investigate the efficacy of these programs or question who is really benefiting from them, but reducing the principal of the mortgage to market value in bankruptcy seems to be some new phenomenon that has never existed before.

Look at the options of an underwater homeowner under this plan.

Option 1. Work with the plan and get mortgage payment reduced to affordable level. Now you are stuck for the next few years in a house you can't sell without a incurring a loss. This means that if you lose your job you will be unable to move to take a new job, which will restrict your ability to find work. Plus, your monthly housing expense may be significantly higher than the guy renting an identical house next door, which means you have less to spend and a reduced capacity to save. Finally, with unemployment rising, you could lose your job and then end up in foreclosure anyways.

Option 2. Decline to participate in the plan and walk away from the house and let the bank foreclose. Now you can rent for less, putting much needed spending money in your pocket and maybe saving something for a rainy day. Plus now you are free to move to take a new or better job. Plus, if you do lose your job, you can choose to downsize the housing you rent to keep afloat.

A lawyer I once worked with who did foreclosures used to like to say that he was just selling a house that the owner should have sold a long time ago. I think that is still true today, and we aren't doing homeowners any favors by helping them keep their ball and chain.

Doc at radar station is completely right. I know it is justified in their minds is that in helping banks we help the financial system, yada, yada, yada. And I am afraid that in Geithner's and Summers' minds (and perhaps more important, in the mind of the man behind the curtain, their old mentor and benefactor, Robert Rubin) this will help both homeowners and banks until housing prices return to what they "really should be" since "U.S. housing prices never fall." I do think that because people are underwater, if they can make their payments, they will stay in their houses longer than the recent past. This will also mean that the U.S. labor market will be less flexible then it has been in the past as folks will be reluctant to move. Demand for buying houses is also likely to face a long term downward pressure as rents fall.

I applaud the program for being smart enough to put in limits. House flippers won't benefit since it must be owner-occupied, and people that are "too underwater" for a program to work aren't eligible. Perhaps the 5% over the home value is too little, but perhaps not. I'd like to see what numbers they used to come up with that 5% figure as appropriate.

Had the last administration done this, we all know there wouldn't have been any such limits.

In the matter of comparing home ownership with renting we see again the dangers of mixing speculation in asset appreciation with productive economic activities. The mortgage tax break had become a massive subsidy for speculation and scams of various types. This is something which should be part of the discussion.

OMG, Dean.
Maybe some people who won't break even off of their home/mortgage will be glad to stay in their home and avoid all the non-financial costs of foreclosure and/or bankruptcy. So they won't be able to sell within seven years -- as if "matching the national average" is in itself something to strive for.

Making it possible to refi at current market rates is the difference between having $100 dollars for food, out-of-pocket health expenses, or paying down credit card debt and having nothing. For some people.

A more "progressive" stance, I think, wouldn't be so dismissive or perhaps oblivious to the possibility that there are more than just "two basic measures that should be used to determine how much homeowners will be helped." People are a little more diverse and complex than you seem to allow.

IMHO.

The program won't help people in the worst bubble areas, because their houses are worse so much less than the mortgage. Second, I don't want to be a broken record, but it is very difficult for former homeowners to rent apartments after foreclosure, and many former homeowners live with friends or relatives because they can't find landlords who will rent to them. And when landlords do rent to them, the tenants, having paid substantial deposits, find that the house they're renting is in foreclosure and the tenants will have to move again and, in many cases, lose all the money they paid in deposits.

This is why there's no equity requirement to apply for assistance. The government and the banks don't want to see homes' actual prices.

Obama's plan is a good reason not to do appraisals. And if it prevents a few foreclosures for a while, few properties will be listed for sale.

The whole plan will allow the banks to minimize losses on their mortgage securities for a while. But all they're doing is hiding.

the weakonomist wrote, House flippers won't benefit since it must be owner-occupied, and people that are "too underwater" for a program to work aren't eligible.

But both of those things are easily gamed.

anonymous wrote, A more "progressive" stance, I think, wouldn't be so dismissive or perhaps oblivious to the possibility that there are more than just "two basic measures that should be used to determine how much homeowners will be helped." People are a little more diverse and complex than you seem to allow.

Yes, but that's a frail reed upon which to build public policy. Especially because (a) as Dean points out, it won't really help the homeowners, (b) they don't really deserve that kind of help. (Traditional welfare---income support---is another matter.)

The discussion seems to miss the most important point.

The Obama plan is deficient because the federal government will hold the homeowners to a higher standard in qualifying for relief than the banks under the bailout plan.

Why should the Obama plan be so fundamentally unfair to homeowners?

Is there in greater moral hazard in rescuing a homeowner from an investment in his home that is underwater than in rescuing AIG and the banks from their underwater investments? Is there any reason to believe that the homeowners should be wiser than the bankers and held to a higher standard?

Let's get real. The current market intervention by the federal government is designed to insure that taxpayers and homeowners bear the ultimate cost of deflating the housing bubble. Yesterday's NYT front page article on the former Countrywide exec who reaped $200 million in "compensation" at Countrywide is now buying up mortgages in default or foreclosure at perhaps 35% of orginal face value and then offering "deals" to the homeowners. The result apparently is a huge, and undeserved, profit.

Why should we even be discussing the merits of the Obama plan if we can't admit that Obama has picked the banks to be the big winners and the homeowners, taxpayers and voters to be the big losers?

I'd like to see what numbers they used to come up with that 5% figure as appropriate.

The refi plan allows borrowers to roll closing costs into the refi. Roughly speaking, 5% is toward the top end of what people can expect to pay in these closing costs.

So really, the plan envisions allowing people to refi for 100 percent of the home's current value, plus adding up to 5 percent in closing costs to the loan balance.

“This plan will help make home ownership more affordable for nine million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans,” said Housing Secretary Shaun Donovan.

What kind of imbeciles are running this country? Here we have the Housing Secretary saying that the government will make housing more affordable by keeping house prices inflated. It’s time to seriously consider secession.

With regard to PeonInChief's statement that people who have been foreclosed on have trouble finding landlords who are willing to rent to them, I suspect Mr. PeonInChief has never been in the residential rental game. My wife used to work for a property manager for rental houses a few years ago, and at that time the only people who were looking to rent houses were people with terrible credit histories (the ones with half-decent credit histories were all out buying houses they couldn't afford with zero down). The rental housing market is driven by supply and demand, and in an nation with record vacancy rates for housing units (see my blog) and record numbers of foreclosures, landlords who are picky about renting to people who have been foreclosed on will soon find themselves joining the ranks of the foreclosed-on.

He didn't say he would make it more affordable for *you*, Geronimo...unless you currently meet the qualifications for loan modifications too.

Nevertheless, NOTHING will stop the asset bubble from deflating to (if not past) the historical trend.

The Repugs really did shoot the golden goose in the head this time just like Coolidge and Hoover did in the 20s.

Yes, AndyfromTucson is right...this is the worst rental market for landlords in decades...they won't be nearly as tight about renters as they would have been two years ago.

Even Leona Helmsley had to make her mortgage every month...

Just wondering what you think about the House passing the bankruptcy reform legislation on Thursday the 5th. Seems like they're taking the advice you, Mr. Baker, offered a long time ago and are giving bankruptcy judges the authority to renegotiate mortgages with troubled homeowners. However, I don't see that judges are being given the authority to set rents and let the foreclosed stay in their homes as renters, and banks also extracted concessions on the bill, namely that judges will try to reduce interest rates before the principal and will get the bulk of the profit if the houses are later sold at a higher price. What are your thoughts on this?

Deanbc,

I'm glad to see the bankruptcy measure get through the House. I hope the Senate passes it.It is a simple measure that will help people who need it.