Thursday, March 27, 2008

BARACK OBAMA

Obama, Insisting a Bailout Plan Isn't a Bailout Plan

Obama, today:

To stabilize the housing market and help bring the foreclosure crisis to an end, I have sponsored Senator Chris Dodd's legislation creating a new FHA Housing Security Program, which will provide meaningful incentives for lenders to buy or refinance existing mortgages. This will allow Americans facing foreclosure to keep their homes at rates they can afford.

Senator McCain argues that government should do nothing to protect borrowers and lenders who've made bad decisions, or taken on excessive risk. On this point, I agree. But the Dodd-Frank package is not a bailout for lenders or investors who gambled recklessly, as they will take losses. It is not a windfall for borrowers, as they will have to share any capital gain. Instead, it offers a responsible and fair way to help bring an end to the foreclosure crisis. It asks both sides to sacrifice, while preventing a long-term collapse that could have enormous ramifications for the most responsible lenders and borrowers, as well as the American people as a whole. That is what Senator McCain ignores.

I'm not sure how Obama can say this isn't a bailout, or at least a partial bailout, as taxpayers are on the hook for repaying those refinanced mortgages if the homeowner doesn't.

Representative Barney Frank (D-MA) and Senator Chris Dodd (D-CT), the Chairs of the House and Senate committees, respectively, with jurisdiction over housing, have proposed a plan using the FHA under which lenders that chose to take part would agree to reduce the loan amount and refinance the mortgage at a lower interest rate in return for a cash fee. Refinanced loans would be guaranteed by the FHA, and the lender would have no further credit exposure if the borrower subsequently defaulted. This means that if a refinanced loan later defaulted, the taxpayers would cover any losses.

By the way, considering how Obama is touting this as the solution, it's ironic that in two weeks, to the best of my digging, the bill has not yet been introduced, nor is it listed on Thomas. Dodd and Frank announced "their intent to introduce" the legislation back on March 13.

The reason Obama is going to insist this bailout plan isn't really a bailout - even though taxpayers would end up covering the costs of every refinanced loan that defaulted- is because the actual details of the plan would be phenomenally unpopular. Rasmussen recently reported, "Fifty-three percent (53%) of Americans say that the federal government should not help out homeowners who borrowed more than they could afford. A Rasmussen Reports national telephone survey found that 29% disagreed and believed that federal action is appropriate. Seventeen percent (17%) are not sure."

UPDATE: My main reason for thinking this proposal is a terrible idea is that it's a bailout, but apparently financial analysts also think it just won't work:

Proposed legislation aimed at refinancing troubled mortgages may shut out two thirds of the loans it aims to fix due to restrictions on borrower eligibility, according to UBS Securities...

But terms that borrowers must meet, such as caps on loan size and debt-to-income levels, limit the scope of the plan, the analysts, led by Laurie Goodman, wrote in a research note dated Tuesday...

While a bailout is necessary to buoy the housing market, "we feel many authors of these proposals fail to appreciate the difficulty in meeting" key criteria, such as excluding 'bad' homeowners that exaggerated income, had faulty appraisals or lied about the use of the property," they wrote.

"If all the 'bad' borrowers are eliminated, the program will not help enough homeowners to significantly impact home prices," they added.

The number of loans eligible for Frank's program is probably even lower than estimated because other factors, such as the requirement that borrowers be current in payments for the past six months, were not yet factored into calculations, the UBS analysts said.

One of the few things I like about the Dodd-Frank legislation rough sketch of what the final bill might look like is its limit that "only owner-occupants will be eligible for the new FHA-insured mortgage.  No investors or investor properties will qualify." The problem is, investor properties, second homes, etc., are probably a healthy chunk of the troubled mortgages right now.

If you have paid your mortgage for the past six months, you probably don't need the federal government coming in, helping you refinance, and then guaranteeing your mortgage loan... 

03/27 02:15 PMShare