Obama's Housing Plan .. Some things to think about ..

http://prospect.org/cs/articles?article=rescuing_americas_homeowners

The Homeowner Affordability and Stability Plan represents a solid step or two in the right direction, but it stops short of providing a majority solution in the short term and produces no real solution for the long term. Additionally I think the objective of the plan is too narrow. It is necessary, essential even, to stop the bleeding and stabilize the current chaotic atmosphere, but the financial instruments and aid, need to be administered around a new "declined" base line of real estate values. There is no mention of this in the HASP. Home values and interest rates need to be addressed in this correction. If we merely adjust interest rates to bring monthly payments down, that helps the homeowner more than it does the bank, which is a good thing, but unless the inflated principal is adjusted downward, it does potentially nothing as a long term solution that will enable home owners to regain equity or pay off their mortgage over time. Unless a mortgage can be retired at some point that is reasonable for the homeowner, and profitable for the bank, we will have a circular, recurring problem.

It is reasonable to regulate % of income devoted to mortgage payment. This should be a no brainer and nonnegotiable. Deregulation disjointed these two factors. This contributed significantly to the current housing crisis. Obama's plan to force the banks to restructure loans to represent 38% of income, and then subsidize to 31% of income is a solid idea. An additional incentive to the banks on loans that do not require that subsidy would go along way to stabilizing loan risk ratios. It will be difficult and expensive to do this in the current climate due to the large number of loans that exceed these payment to income perimeters. Three factors are going to bog this down: overexposed original loans, increased loss of income and decreased home valuations. Nonetheless this should be done, across the board. It is a good use of taxpayer moneys. This correction has long term benefits and will facilitate stable mortgages in the long run.

Also...and this could be really positive, if banks were regulated to write mortgages at no more than 31% of annual income, there would be a host of home builders who would find a way to build affordable housing for low, middle and high income HH's. In the current system, home builders can inflate the value of all the homes they build and be successful in selling them, because banks could and would approve the sale of expensive homes with high mortgages to low and middle income HH's. Builders will only build product they can sell. If this income to loan ratio is enforced, home builders will find a way to build homes to accommodate a wide range of income levels.

I like the concept of refining bankruptcy law to allow judges to adjust mortgages. I would imagine that the largest debt an individual carries is a mortgage..and if they are facing bankruptcy, the ability to refine that debt should in many cases mitigate the need for a bankruptcy filing...all very positive. Banks will want to keep this power out of the courts, so the mere adjustment in the law should make the banking system, relative to mortgages, work much more efficiently while making the bank/customer partnership more consumer friendly. The down side to this, in our current climate, is that this adjustment, may cause a run on bankruptcy filings...which is obviously not good.

Dean Baker's idea on "renting" over a 10 year period does not solve the problem in my opinion. Yes, it keeps people in their homes, but it postpones the inevitability of a default....potentially. Several blogs back I floated a concept of "rent to own"...which would allow an "at risk" homeowner to stay in their home after the mortgage and principal had been modified to accommodate current home value and income. This would be negotiated with the mortgage holder. Monthly payment would include both interest and principal, so at no time is the homeowner forced into an interest only payment scenario. In exchange for these modifications, the consumer would accumulate a small secondary debt on the mortgage that if paid at specific points throughout the life of the loan, would move them into a pure home ownership status, Vs a rent to own status. Perhaps a requirement to make 13 payments per year Vs 12, for 5 years, to regain pure ownership status. This solution, I think, is a way to keep a person in their home, gives them an avenue to actually "own" their home as they eventually retire the loan, and repays the bank some of their loss through the additional payment plan.

Generally speaking....although long winded, my humble opinion on this mortgage problem is that the solution should be heavily but responsibly weighted to the consumer while mitigating the loss to the bank. This is accomplished by enforcing responsible lending regulation, with an income to payment ceiling, and reducing the profit margins banks make on mortgages today. This will bring interest rates down and keep them reasonable. It will also go a long way in balancing risk ratios for mortgage holders. Principal home values must be corrected, so people can eventually pay off their homes. For a long while, banks enjoyed huge profit margins and revenue gains on the inflated home market, they will now need to adjust to lower principal home values, and act just like every other responsible business as it adjusts to cost of goods and market shifts. If they act constructively, and are appropriately, but not over regulated, banks will continue to make solid and consistent margins on mortgages. It is significantly less expensive to adjust a mortgage payment, and maintain it, than it is to loose a mortgage entirely, and carry the loss.

Obama's plan protects the banks first while suggesting solid and pragmatic aid to the consumer. But neither Dean Baker nor the HASP puts forth a foundation to help current homeowners pay off a mortgage. The ideas merely suggest ways to avoid neglect and/or abandonment of a mortgage. We have absolutely no solution at all if the solution does not facilitate a 60 year old person, who carries a mortgage to retire it. Without that, taxpayers will be paying for senior living facilities, which will drain our tax base further. Not to mention the drain on dignity and increase of stress a 60 year old is forced to deal with, as he/she struggles to make a house payment after 35-40 years of tirelessly working to care for his/her family and keep a roof over their heads. Government programs need to specifically address the needs of citizens, regardless of age, before they pander to the private institutions who are supposed to serve us, but often rob us...

Finally, the HASP still does nothing for the "Responsible, never missed a mortgage payment no matter how hard the struggle" citizen. It seems more than obvious to me that if meaningful, monetary incentives were created to reward the consumer with the "excellent credit rating" we would have less default and a lot less resentment. More importantly we would feel less like a "chump". Something feels dangerously wrong to me as I sit here month after month, paying my bills, on time, wondering if in the long run I would be better off defaulting on my mortgage. Personally I would struggle with that decision, and ultimately not be able to ignore my responsibilities, but I am fairly convinced, given the tone of the stimulus, and bail out philosophies, that I will, once again, be in the group that missed the wave of wealth creation, because I didn't participate in or understand the fictitious principles of debt swapping....