Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

A Few Reactions to the Foreclosure Plan | February 18, 2009

I just read through a brief outline of Obama’s foreclosure plan and heard a few of his comments on CNN. First, let me say that it’s a good plan, and more money than I expected. A quick sketch of the plan:

  • $75B to reduce montly payments
  • $200B to shore up Freddie and Fannie
  • Lower the monthly payment of borrowers to a 31% debt-to-income ratio
  • Guarantee all conforming loans
  • Incent loan servicers by offering a $1000 credit for each modified loan and $1000/year on each loan where the borrower stays current

First of all, the amount of money is striking, $275B total, and it shows the administration is serious. Estimates suggest the plan may help up to 6M people. Second, the plan is detailed and covers a number of important bases. Incenting loan servicers is a particuarly important piece of the plan. Unlike the plan to repair the financial system, this plan has met with strong reviews. This Bloomberg article highlights a number of experts hailing the approach:

“The plan is good and strong, comprehensive and thoughtful… I think it will be successful in modifying mortgages in a way that’s good for homeowners.”

Jamie Dimon, JPMorgan Chase & Co. Chief Executive Officer

“The Obama team is betting that if they can afford to stay in the home month-to-month, that borrower is not concerned about what today’s value of the home happens to be… I think that’s the right bet.”

Howard Glaser, former counsel to the secretary of the U.S. Department of Housing and Urban Development

“We think it is accurately aimed at homeowners at risk that are most likely to represent avoidable foreclosures, so it is likely to have a maximum impact where the dollar is committed,”

Robert Davis, executive vice president of the American Bankers Association, in a telephone interview.

I do have a quibble with some of what Obama said during his speech, though. Here’s the passage that caught my attention:

But I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford. In short, this plan will not save every home.

I’m sorry, but even with all of the provisions included in the plan, there simply isn’t a way for the government to determine who bought a home they knew they couldn’t afford. This will undoubtedly help a good number of people whose eyes got bigger than their wallets, and it will also not help people who were genuinely duped. Also, there are a fair number of “dishonest” lenders who will in all likelihood receive a generous amount of aid. I know Obama needs to acknowledge a sense of fairness here, but there’s just no way to follow through on that.

Having said the above, the foreclosure plan still seems to be a strong step in the right direction

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