PROBLEMS WITH THE OBAMA MORTGAGE STABILITY INITIATIVE PLAN
February 27, 2009
On February 21, President Obama released his Homeowner Affordability and Stability Plan to help stabilize the deeply troubled housing finance market by providing several forms of assistance to as many as 7-9 million borrowers who may be at risk of defaulting on their mortgages.
The Obama plan suffers from specific weaknesses and risks, say Heritage Foundation researchers Ronald D. Utt and David C. John.
- The plan's Stability Initiative bestows new and costly benefits on those who took on more debt than they could handle, including credit cards, automobile loans, and mortgages (including refinancings and seconds).
- Worse, the value of the benefits will vary in direct proportion to the degree of borrower financial irresponsibility and the intensity of community land regulations.
- Homeowners with a first mortgage as large as $729,750 are eligible for the initiative, meaning that the well-to-do will receive more financial benefits than those of modest means.
And as analysts at one nationwide financial firm noted, "The modifications would go disproportionately to borrowers who overstretched and who lied about their income." This moral hazard sends a clear message to the American people: The worse the behavior, the greater the reward.
- Under this Stability Initiative, borrowers with a ratio of mortgage debt service to income greater than 31 percent can have their mortgage interest rate reduced to as little as 2 percent if that is what it takes to achieve the 31 percent ratio -- with government paying half the subsidy and the investor/lender surrendering the other half.
- If this concession is insufficient to reach 31 percent, then the servicer (as opposed to the lender/investor holding the mortgage) can lengthen the term of the loan and/or reduce the principal amount owed to achieve the 31 percent.
- Eligible borrowers may also have loans that are as much as 50 percent greater than the value of the house.
Given these weaknesses and others, there is little indication that President Obama's Homeowner Affordability and Stability Plan will provide any relief -- short-term or long-term -- to the beleaguered housing market, say Utt and John.
Source: Ronald D. Utt and David C. John, "12 Problems with the Obama Mortgage Stability Initiative Plan," WebMemo No. 2311, February 25, 2009.
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