Obama’s housing plan, Part II

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Today we got a major follow-up to the Obama Administration’s housing-rescue plan. You can now catch a break on your second mortgage, too. I don’t think the story I wrote is online yet, but here’s the sneak-peak:

Like the broader “Making Home Affordable” housing plan announced on Feb. 18, the new effort involves the federal government giving money to mortgage servicers when they lower homeowners’ monthly payments—and to borrowers when they keep paying their loans and don’t walk away. The incentive payments to modify second mortgages are meant to address a major omission in the original housing plan. Some 50% of at-risk mortgages carry second liens, but before today’s announcement, there was no systematic way to deal with that pot of money owed.

Under the original plan, mortgages servicers were paid to reduce homeowners’ monthly payments to as little as 31% of gross income—but that only covered first mortgages. This seriously alarmed some investors in mortgage-related securities, since many second mortgages are owned by the same companies that service the loans. The companies were essentially getting paid to trim the amount owed to outside investors while not necessarily taking a haircut themselves.

Now, when a participating servicer changes the terms of a first mortgage, it will also have to reduce the interest rate on the second lien—to either 1% or 2%. The government will pay for half of the loss incurred by the owners of the loan from the $50 billion bucket of money it had already pledged to housing-rescue programs. Mortgage servicers will be paid to make the change, and homeowners have their first-mortgage principal reduced as long as they stay current—by up to $250 a year for five years.

From what I’ve heard and read about the investor response to the original plan, this is a very important and substantial development. I mean, maybe we shouldn’t be doing any of this anway—but if we want to have a national loan modification standard, I think this is going to give us a much better shot at having a program that works.

I do, though, still think a few things are missing.

First, the Administration continues to ignore the problems caused by investor-owned homes. All of its programs are for houses that people own and live in. I know there’s a big moral hazard argument against helping folks who were just out to make money—now that making money has such a bad rap—but if part of what we’re trying to do is stabilize housing prices, then investor-owned residences matter. Especially in markets like Las Vegas and Miami.

Secondatively, the mortgage refinance part of the plan, which is run through Fannie Mae and Freddie Mac, still only applies to people whose loans are owned by those entities (about half the population, but nonetheless hardly a fair standard at all)—and whose homes are underwater by no more than 5%. That means the people in the markets where property prices have dropped the most get no help. I am surprised there hasn’t been more of a to-do over this.

Finally, and this isn’t something that’s missing, just an observation: Is it possible that we’re going to have a housing rebound and these programs are going to get the lion’s share of the credit even if they actually don’t have that much to do with what’s going on? Let’s all be aware of my favorite logical fallacy: post hoc ergo propter hoc. Today’s Case-Shiller release showed a slow in the decline in home prices. I’m not saying the end is here, but if this is the beginning of the end, then down the road we might be tempted to attribute the turn to our new national housing policies. When, for the record, they haven’t started to kick in yet.

UPDATE: Here’s my story.