Opinion: 'Absurd' Understates Obama Plan

By Danielle Babb, dean of business at Andrew Jackson University.

Many are in favor of the Obama Housing Plan that was announced on Wednesday, February 18, 2009. It was touted as the first plan designed to help struggling homeowners who were unable to refinance because they owe more than their homes are worth.

The plan would supposedly help 7 million to 9 million homeowners, with 4 million to 5 million through Freddie Mac (FRE) and Fannie Mae (FNM) and the rest through incentivizing banks to modify mortgages.

The plan isn't all it's cracked up to be. There are several issues on both the homeowner and investor side as well as the lender and builder side that make this plan problematic in the long term.

First of all, for banks to receive government assistance of any kind (I'm not in favor of banks receiving government assistance, but many banks say they need it to stay afloat), they must play by the rules of the game.

The rules will require that banks modify mortgages such that the maximum debt-to-income ratio (the amount of money you spend each month on your mortgage), or DTI, for a homeowner is 31%. Historically banks have allowed 40%; even 47% if the homeowner has good credit.

Bank of America (BAC) allowed mortgage holders to go to nearly 50% and many of us are paying those loans each month despite struggles doing so. Wells Fargo (WFC), even on investment properties, often bent the rules to allow a 45% DTI. Banks will write down mortgages by principle reduction, lowering rates, extending out the length of the loan or dropping payments - or all of the above - to meet the 31% DTI requirement.