What to think of Obama’s housing plan

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.


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