What to think of Obama’s housing plan

by on February 19, 2009 at 7:09 am in Economics | Permalink

The ever-worthy Mark Thoma rounds up reactions and analyses, including some critical remarks from CalculatedRisk and some praise from Felix Salmon.  Willem Buiter is negative (worth a read).  Simon Johnson says it's not enough.  WSJ surveys a few reactions as well.  I'll add some observations:

1. Housing prices ought to be lower, and as quickly as possible.  So aiding homeowners cannot be justified on the grounds of propping up prices, which is difficult to accomplish anyway.  Such aid has to be justified in some other way.  The main argument is that our ex post procedures for foreclosures are not what we would have chosen ex ante, had we known that such a severe housing and financial crisis could be possible.  That opens up some room for beneficial intervention, but a good plan it still hard to pull off.

2. When it comes to refinancing the Fannie and Freddie loans, and expanding those agencies, how many foreclosures will this avoid?  We should be reducing the size of the mortgage agencies rather than putting another $200 billion into them.   

3. We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income.  (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income.  The government then steps in to lower payments to 31 percent of income.)  I don't feel moral outrage (although it is morally outrageous), I just don't think it is a good use of money.  I also wonder how it works when your income is quite variable year to year.  Are they sure there is no way to game this?

It will in the short run prevent some (enough to matter?) foreclosures.  But it won't keep up the long-term price of homes or prevent eventual foreclosures when the home has negative equity.  It adjusts interest rates on the payments, not principal on the loans (thank goodness).

Most of all it is a bad precedent which we will live to regret.  It is a significant move away from the idea of commercial decisions based on contract. 

One source,
by the way, suggests that lenders will have veto rights over these
"renegotiations" by choosing to foreclose instead of accepting the lower payments.  But foreclosure is quite costly for the bank, so I don't feel so much better.

By the way, aren't we trying to help the banks?

4. Sellers receive various bonuses for modifying eligible mortgage loans.  This is ideally a Pareto improvement if more of these contracts could be modified than is currently the case.  My doubt is whether the subsidy will affect many modification decisions; so far I don't see that lenders are putting a lot of effort into renegotiations.  Here is a good article on when modifications work and when they do not.  I doubt if an extra 1k will make much difference.

5. Guidelines for modifying eligible mortgage loans are established.  Ideally this could give more scope to the Coase theorem, but see my reservations under #4.

Felix Salmon, who likes the plan, nonetheless offered up a scary bit:

But really nobody has a clue how much it will cost: that's entirely
dependent on whether or not the plan succeeds in arresting the fall of
house prices.

The bottom line: #3 is a deal-killer for me.  Just say no, and you don't even need a moral hazard argument (they are overrated, anyway) to see why this is troubling.  I'd like to see the plan's proponents predict how many foreclosures it will forestall and be willing to take their lumps if they are wrong.

1 MichaelG February 19, 2009 at 7:18 am

In California, where most of the losses are, the $1000 incentives are trivial. Also, most of the loans during the bubble were non-conforming, so they won’t be helped by the Fannie and Freddie action. A note on CR says they won’t be helped by the 38-31% reduction either.

The cramdowns on the other hand, will probably come into play in California and elsewhere, since bankruptcies are going to be pretty common as ARM payments adjust. This has to complicate securitization of mortgages going forwards, and drop the values of the current set of MBS.

2 Highgamma February 19, 2009 at 7:39 am

“Are they sure there is no way to game this?”

It’s not a question of whether there is a way to game this but how many ways there are to game this. Given the level of fraud in the mortgage market over the past few years, I can only imagine the level of fraud we will see in this “bailout”.

3 Andrew February 19, 2009 at 7:50 am

It is obvious now, especially in a broad downturn in the midst of a housing bubble crash, that a foreclosure is not meant to be applied generally. It is a nuclear option intended not to be used.

Why wouldn’t banks want to renegotiate? I would think that they would prefer to renegotiate on a case-by-case basis. That preserves the threat of foreclosure and selects for the most desperate and motivated borrowers.

Wouldn’t renegotiating to a 50 year mortgage at similar rates preserve the present value of the loan for the bank while improving affordability for the borrower, thus not hitting the value of the loan and improving the uncertainty around loan performance?

4 liberalarts February 19, 2009 at 7:56 am

I wonder how many foreclosures are for households that can reliably make a 31% of income mortgage payment but can’t handle 43%?

5 Mike Huben February 19, 2009 at 8:08 am

“Most of all it is a bad precedent which we will live to regret. It is a significant move away from the idea of commercial decisions based on contract.”

I’m sure they also said that about manumitting the slaves. The issue is the same: some people think human values ought to trump economic values.

Libertarians raise this same point very frequently for all sorts of day-to-day issues such as bankruptcy law. Let’s go back to the good old days of debt bondage!

The simple fact is that our commercial system is created to act as a sort of sandbox: businessmen can play relatively safely in the security of the sandbox. But when one of them takes off his pants and poops in the sandbox, the children are lifted out until the sandbox can be cleaned.

6 John Thacker February 19, 2009 at 8:25 am

Mike Huben–

“The issue is the same: some people think human values ought to trump economic values.”

Yes. And in my case, I didn’t buy a house here in NoVA because prices were too expensive for me to afford. And now the government is trying to prop up prices so that I still won’t be able to afford them. My “human value” is that I’d like to be able to buy a home without having to go into debt so much that I’m dependent on the goodwill of banks and the government saving me. When house prices go up to unaffordable levels, how is the solution to keep them that high?

House prices ought to go down “as quickly as possible,” babar, because that’s the only way to start getting the houses sitting empty to be sold, and to get the housing market functioning again. Also the only way to get people to be willing to sell and willing to move. If house prices are going to fall, it does no one any good to have it drag out as long as possible with sellers unwilling to lower prices so that they’ll sell, and buyers unwilling to buy until the prices lower. That just leads to empty, abandoned houses.

No one is talking about debt bondage. Neither bankruptcy nor foreclosure results in debt bondage.

I feel moral outrage because I’m a renter who chose to rent because I couldn’t afford a house, and I thought that they were overpriced. Now I’m going to foot the bill for everyone that I thought was foolish for buying a house that they couldn’t really afford, expecting to refinance because “prices always go up.” Not only am I going to pay for it with my taxes to bail these people and their lenders out, but the government is trying to step in to assure that prices always go up.

7 save_the_rustbelt February 19, 2009 at 8:42 am

All these really smart guys do not seem to understand there are two different situations.

In Ohio and Michigan, where foreclosures have been high for several years, there never was a bubble, just a declining job market.

Will a California solution work in Michigan? Not likely.

8 DanC February 19, 2009 at 8:50 am

As housing price fall more people can afford housing. Marginal housing will be left vacant in some communities. But housing will return to the point where the average family in a community can afford the average housing in a community.

People who lied on loan applications should get zero help from the government. People who were trying to flip houses should get zero help. ( I would define this as people who purchased more then one home in the last four years, except for job transfers.) People who took out second mortgages to tap the equity of their inflated home prices should get zero help. I would not help anyone stay in a house where the value of the home is 25% above the mean value of the community.

I’m not sure that leaves many people in trouble.

I am outraged that I will now subsidize people who live in bigger more luxurious homes then I own, people who can only maintain that lifestyle with government help.

I was prudent and refused to spend more then 25% of my income on housing. Instead I increased savings to prepare for the future. I have lost large amounts on my investments. Do I get help from the government on my Bank of America stock, a company the government coerced into bad investments?

Group A invested most of their portfolio in highly leveraged real estate. Group B invested their portfolio mostly in the stock market. Why is the government coming to the aid of group A but not group B?

I can understand helping the poor, the maimed, the mentally ill. I don’t understand government help to people living in McMansions with built in pools.

9 stephen February 19, 2009 at 9:23 am

So its o.k. for the FED to try to pop the bubble, but it is not o.k., once the bubble has popped naturally, to let it stay popped?

This seems to be a weird intersection.

10 Colin February 19, 2009 at 9:39 am

Simply outrageous. Like many other commenters, I too held off on buying a place here in DC because the prices were so ridiculous. Now my prudence is being punished.

Why do we need a public policy response anyway? The market is already addressing the problem. Housing construction is down and first time buyers are starting to enter the market (anecdotally I have two friends — first time buyers — that have each put in bids in the past 5 weeks). Lower supply and new demand will prop up housing better than anything Obama could come up with.

And $200 billion more for Freddie and Fannie, the same two who helped stoke the crisis in the first place? The mind boggles.

Welcome to the consequence free era. In the minds of many in government no one should suffer from their actions. For all the paens to sacrifice and hard choices from the president, the reality is that we are willing to do anything but. How is digging ourselves further in debt with this $275 billion plan a bold move? It’s gutless.

Obama is quickly making the profligate Bush look like a miser. These are some unreal times we are living in.

11 RW Rogers February 19, 2009 at 10:10 am

1. The solution to the problem of people over their heads with a variable rate loan is to give them a new government-sanctioned variable rate loan? For most, that just means that foreclosure will happen in 5 years not this year, after everyone has spent thousands deferring the inevitable.

2. IIRC, by far the largest number of adjustable rate mortgages will not reset until 2011. This program does little if anything in anticipation of the disaster-in-waiting when those float to market rates, rates that will undoubtedly be much higher due to the increased risk involved in lending after government intervention.

The Law of Unintended Consequences at work, I think. The one law never passed by Congress, yet the one that is almost always discovered to be a rider contained in the mass of verbiage contained in any congressional legislation.

12 Joen February 19, 2009 at 10:33 am

How about they let me deduct what I pay on rent from my income tax like interest payments on mortgages? I see the government spending hundreds of billions on everything but somehow I never manage to see any of it coming my way. Maybe I should start being an irresponsible citizen, get over my head with debt, start a bank get money from savers, lend it to me and open a car company, hire thousands of people and promise them huge benefits when they retire.

13 SkeeWCU February 19, 2009 at 10:38 am

The current housing situation has been brewing up for over a year in most places. The only action left in most real estate agencies are people trying to invest when houses are going for half what they would have in mid-2007. I believe that the policies we use to help the housing market should step away from our ongoing desire to help the present without researching and foretelling the future.

Like Tyler mentioned, the way that we handled foreclosures before thinking about possibilities of such a downward spiral did not take into account the future, nor did it have any risk management aspects, much like the sub-prime loan situation created by banks. In order to execute the plan correctly, I believe the policy should not be blasted out into practice like our recent bailouts have been delivered, but need consideration and thought about the future prior to launching another failure of an idea.

14 Yancey Ward February 19, 2009 at 10:43 am

This plan is a complete joke. All $75 billion will get spent, and I doubt more than a quarter million people will actually end up keeping their homes who were going to lose them if we do nothing. I have to say that we are dealing with unserious people in Washington all around.

And the additional $200 billion for the GSEs is just more money down a giant rat hole.

15 T. Shaw February 19, 2009 at 10:53 am

OUTSTANDING! Your No. 1 “Housing prices ought to be lower” should be front and center in every moment as Obama’s geniuses tumble around like straw in a cyclone trying to find more asinine ideas at which to throw $$$$ tens of billions.

Here are my observations.

1. All the president’s horses and all the president’s men cannot put this mess back together again. Geithner: what a maroon! Like a deer caught in the headlights. My beef isn’t that he didn’t pay taxes. Okay by me! My beef is he didn’t have the money to pay his taxes. Plus, he sat by as FRBNY Pres. and watched the US economy (Citigroup, JPMorgan Chase, etc.) die. Imelt: he took GE and dragged it through the mud. I’m not impresseed.

2. The president has no clothes. He thinks (not him his advisors – I doubt he thinks much at all) that this will keep housing prices artificially high. If so, no sales! Back to your No.1 – outstanding!

3. Do they think we are stupid?

16 Gabe February 19, 2009 at 11:57 am

Thacker and Colin are self righteous and have no right ot complain. You have educations and safe places to live, what of yor empathy for those less intelligent?

First we need to save the biggest banks, the economic geniuses at JP Morgan and Goldman need to take over all the crappy little banks so we can get some order in this country, without the big banks this country wouldn’t even survive.

When a poor person goes into foreclosure the banks lose a lot of money and we don’t want that. If a poor person can’t afford to pay 50% of his income to banks then he should have the middle class subsidize his payments so that he pays 38% of hi income(or whatever maximum he can afford). We need HIGHER house prices, because in the long run we want EVERYBODY paying the maximum possible % of income to banks in the form of interest.

Thacker and Colin are immoral, have they ever paid their fair share of income to banks?! We cannot reward this type of behavior, they should have been agressive and indebted themselves to JP Morgan like any other patriotic citizen. If your saving money then you are basically causing others to lose their jobs and this is why I(nor any of the keynsian republican or democrats) feel sorry for you whiners.

17 Ozornik February 19, 2009 at 12:12 pm

So, you kids whined about crony capitalism? How’s a glimpse of socialism feels nowadays?
And you ain’t seen nothing yet.

18 JB February 19, 2009 at 12:30 pm

I am dead set against funding people for their stupidity, but here is my idea: Suppose that many people bought into this housing boom and are now stuck with $500-$700K houses that were truly worth only $250-$350K. (These numbers are generalities, but I hope it gets the idea across.) Have the government fund the present value of the overvalue on the mortgage to the bank today. This will cut principal and interest payments immediately. Then, if those people still do not pay their mortgage, then they should suffer the consequences of really overstepping their means. Concurrently, all local and state governments will lower their appraisal of ALL houses by the same amount and not increase the tax rate on them either. Spread the wealth, sort of. Further, any person that acepts this bailout money will not be allowed the interest write-off on his/her federal income tax return now (assuming they did pay some part of their mortgage this year)or in the future. (No double reward.)

19 Gabe February 19, 2009 at 2:08 pm

let the banks foreclose…who is going to buy the houses? nobody until prices drop…when prices get to a decent price again I’ll buy a second house….yes my calculated net worth in dollars could go down as my house value goes down…but when it is all over I’ll have two houses…this means I won’t have to share our house with a au pair. My au pair will be better off because she gets her own place and lots of responsible poor people like Thacker and Colin will be better off because they get to use their savings to buy a house at a good low price. Goldman sachs loses because their mortgage securities are worth shit and the hosue they foreclose on has no copper/appliances or hardwood floors when they finally get a hold of it. JP Morgan loses because the US gov either defaults on its debt or it papers it’s way out and then nobody buys US bonds anymore. When the primary dealers lose…the american people win. “Fed governor” gets strung up from a tree and we all have a party.

20 John February 19, 2009 at 2:21 pm

The usual broth of topside oversimplifications from Tyler. As if the entire US real estate market were one homogenous whole. As if there haven’t already been huge price adjustments in some markets where there were big run ups, and even relatively stable markets haves seen downward moves of 15-25%. As if we haven’t cut by two thirds the new home inventory being pumped into the market annually. As if real estate prices weren’t showing distinct signs of bottoming in most markets at broadly speaking 2003/2004 levels. Is this going to solve all problems…of course not. Is it going to be broadly ameliorative in stemming both the overall foreclosure rate and in avoiding further price declines that are already slowing: undoubtedly yes. It will also have the side benefit of bolstering the balance sheets of institutions holding the paper. I’m afraid Tyler and others (just read the comments here which are loaded with political bias) are letting their political prejudices/hopes get in the way of reality. $275 billion in the context of the roughly 10% of the US property market that is vulnerable to foreclosure, at least in the context of anticipated employment levels, is huge. Not perfect as there isn’t a perfect plan out there, but definitely a B+. It’s going to work to a considerable extent.

21 Joen February 19, 2009 at 2:30 pm


“…and try to rid the environment of CO2 so that trees can flourish again.”

This guy know nothing about anything that starts with “eco” (economy or ecology). CO2 is called a green house gas for some reason. High CO2 levels are good for plants for 2 reasons: photosynthesis and warm humid weather.

22 Steve Sailer February 19, 2009 at 3:10 pm

According to the National Community Reinvestment Coalition (“the nations economic justice trade association representing 600 community organizations”), in 2003-2004, at the beginning of the Housing Bubble, banks made guess how much in Community Reinvestment Act lending commitments?

23 Steve Sailer February 19, 2009 at 3:11 pm

Over $2,300,000,000,000 (that’s $2.3 trillion) in two years alone.

Isn’t it time to repeal the Community Reinvestment Act?

24 Chris February 19, 2009 at 3:52 pm

Have the government fund the present value of the overvalue on the mortgage to the bank today.

Only if you literally shoot the bankers in the head first. The lenders are where the real moral hazard is, not the borrowers. Borrowers couldn’t have created ARMs and no-doc loans – only the lenders had the power to do that, and they did it, and then they pushed those loans on people who didn’t understand how they were going to get screwed by them. Rewarding them for it would be the height of insanity.

Just ask yourself why didn’t many people make “irresponsible borrowing decisions” in the 1990s? Because the country was a shining beacon of rationality and prudence? I don’t think so. They weren’t given the opportunity to do so because their loan applications were rejected. The change in the system came from the people who had the power to change it.

The lenders are the people who absolutely positively MUST eat the losses or they will be right back to their old tricks as soon as housing prices start going up again. If that means destroying every old bank up to its ears in toxic MBS and starting new banks to replace them, then do that – at least it avoids the moral hazard of rewarding banks for funding bad risks.

25 Justin 9814 February 19, 2009 at 3:57 pm

The housing market is in turmoil, and the fact of the matter is that President Obama must attempt to heal the market, even without a sound solution. It is estimated that within the next three years, over six million people will lose their homes. No plan has been presented that does not adverse effects on either homeowners, banks, or the general population (no magic wand can be waved).

The catastrophe theory of evolution applies to economics in much the same way. There is a sustained people of prosperity and economic harmony (for lack of better words), and then there is an event, or series of events, that destroy the gains that people have made. To rephrase, recessions and depressions are periods in the economy in which the weak systems die out and stronger ones move in (economic Darwinism).

Fannie Mae and Freddie Mac control the housing market. At this point in time, there is not a worthy substitute to move in and take its place. To provide any type of relief, even if not practical or efficient, $200 billion must be pumped into Fannie Mae to relieve homeowners who are underwater. However, a stimulus package for the housing market will not completely ease the suffering at the moment and will have weakened the market further in the future.

Obama’s plan leaves out many variables when discussing proposed relief. For example, what will happen to homeowners who are underwater because of their own errors? How will future income levels be analyzed in order to adjust interest rates? Like any other politician, Obama offers only vagueness when a proper solution that addresses all variables of the problem should be given detail.

26 agm February 19, 2009 at 4:12 pm

This aggravation I’m seeing throughout these comments are resulting from people letting their egos trump their sense. This used to be an economic issue, and now it’s an political issue involving the economy. The actors who actually matter are acting in their professional role, that of politicians. If you’ve lost your house and/or job, you are generally less likely to be happy with the party in power. The question for average Americans then is more how to best survive/take advantage of the situation. The question for the politicians is how to best keep or improve their position. The two are not the same, nor are they economic questions exclusively, or even primarily.

27 Gabe February 19, 2009 at 4:36 pm

You presume too much, My anger is not based on a personal job loss. My family is doing better than ever for the time being. However, the future value of my 3 and 5 year old sons earnings are plummetting as Bush and Obama have worked to destroy the foundations(private property rights) of a prosperous economic future. Of course those guys didn’t start it, but they have accelerated it over the last 9 years.

I don’t care what you call yourself(economist, scientist, politician) creating money out of thin air does not “create wealth”. Increasing the amount of money you promise to steal from unnamed people in the future does not “create wealth” either.

Those are the only two ways to fund huge new deficits. The only jsutification for doing this spending I have heard is people want to protect the “current banking system”. The current banking system has alrady received HUGE subsidies over the last hundred years…this is a scam. That is all.

Why can’t congress audit the Fed? this is not a democracy the FED owns us.

28 Gabe February 19, 2009 at 5:30 pm

Use you savings to buy guns, gold and chicken coops. Then start lynching revenuers. No matter what they say, they aren’t here to help you.

29 Keith February 19, 2009 at 9:37 pm

“But when one of them takes off his pants and poops in the sandbox”

Which is known around here as “dropping a Huben.”

30 Prosperity_Detroit February 20, 2009 at 9:23 am

The big disjunct in all of this conversation is speaking about the rest of America as if all things are equal from state to state and city to city. Living in Detroit, and having lived in Chicago and L.A. I can tell you that this is still one of the most affordable places to actually LIVE in the country. But I’m watching neighbourhoods here empty out like they are in Arizona (from the news). Some is because the market is turning the neighbourhoods upside down at an alarming rate. How do you justify paying a mortgage on a $135,000 house when the same house, same layout next door was foreclosed and now on Realty Trac for $20,000 and LESS!

Any prudent person would just “turn in the keys”, go rent for a couple of months, come back to the neighbourhood and buy their same house for a $110,000 reduction in price. Same house, same neighbourhood, $110,000 less cost, AND at that point it is PAID FOR! No mortgage, stability, and I would totally own the house.

Who gets screwed in this case? The bank. Is this totally bad? I question that. Even in my case, I had an illness that had me debilitated for most of a year. It was a choice: Pay for the health insurance or the escalated mortgage. I did call the mortgage company (Aurora Loan in this case, a subsidiary of Lehman Brothers – ironically), to ask if we could renegotiate for something less than a 12.75% interest. They said “NO”. I make in the top 25% of wage earners in the U.S., but because of an illness, I couldn’t work (hard to puke and pull together financial documents for companies), all explained to the loan company, but they couldn’t take their eye off the “potential profits”.

Foreclosed, now the house sits empty, snow not removed, a good target to strip the copper pipes (that’s if they haven’t burst with no heat in a northern climate), and it depresses the home values in the neighbourhood. It’s still a good house (for now), and now that I’m feeling well, am making even more money than I did before I got sick. If the banks weren’t so damned doctrinaire and greedy, they would be still making money on the house, the city would be getting property taxes, the house would retain it’s value and the neighbourhood could stabilize. This scenerio only encouraged the “flight of the neighbourhood” (apologies to Rimsky-Korsakov).

Oh, and “contract law”? lol. When you stand there with your contract, and the property you now have taken back is stripped, burned, and bulldozed, what will that contract get you then?

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