Updated from Wednesday, Feb. 18
Critics across the housing and banking industries say the Obama administration's plan to spend up to $275 billion to aid homeowners at risk of foreclosure may be more difficult than imagined and help fewer homeowners than it sets out to assist.
outlined on Wednesday, called the Homeowner Affordability and Stability Plan, is intended to modify as many as nine million existing mortgages that homeowners cannot afford, or whose value exceeds that of the home.
One component of the plan will spend $75 billion to reduce monthly mortgage payments for 3 million to 4 million "responsible," but at-risk homeowners by matching lender reductions dollar-for-dollar. It will also provide other incentives to keep loans current and to rework mortgages instead of foreclosing.
A second component will allow 4 million to 5 million homeowners who are not yet at risk of foreclosure refinance into lower mortgage rates. Those homeowners must have conforming loans owned or guaranteed by
The third component will provide up to $200 billion to shore up
through purchases of preferred stock and mortgage-backed securities. The intent is to boost confidence in housing finance agencies that own or guarantee half of the country's mortgage debt, and to provide additional liquidity in the mortgage market.
The plan intends to help residents who were deceived into entering risky agreements, or those who live in areas where prices have dropped so precipitously that the mortgage principal is worth more than the home. At a high school in Arizona, a state especially battered by the housing crisis, Obama said that speculators, subprime borrowers who knowingly took out outsized loans they couldn't pay off, and dishonest lenders need not apply.
"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly," Obama said. "It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans."
Several major banks were quick to express support for the plan.
CEO Jamie Dimon issued a statement Wednesday evening calling it "comprehensive and thoughtful" and said he believed it would "be successful in modifying mortgages in a way that's good for homeowners."
Co-President Mike Heid, noting that 93 out of 100 of the bank's mortgage customers were current on their payments at year-end, said in a statement that the Obama plan "will help many of these customers lower their monthly payments and stay in their homes."
Wells Fargo also joined
Bank of America
and JPMorgan in pledging to hold off on new foreclosures for several weeks, as the administration's plans are implemented.
But some are quick to point out that distinguishing the "responsible" homeowners from the irresponsible ones may not be so cut and dry.
Christie A. Sciacca, who led examination, supervisory and bank-rescue projects at the Federal Deposit Insurance Corp., and recently served as deputy director of supervision at the Federal Housing Finance Board, acknowledges that some initiative had to be taken to stabilize the housing market. But he also warns that it will be incredibly difficult to accomplish the goals as outlined.
"There's a lot of room for mischief," says Sciacca, who is now a director at the consulting group LECG. "How are they going to sit down and say, 'You're worthy for this, but you're not?'"
The Mortgage Bankers Association also points out that responsible borrowers whose loans exceed property value by more than 5% will not be helped as much by the program -- limiting its effectiveness in hard-hit regions like California, Florida, Nevada and Arizona, and some areas on the East Coast. Furthermore, the plan does not include assistance for those with jumbo mortgages, or loans held in private-label securities.
Another prevalent issue is the job market, as slashed work hours and rising unemployment hurt homeowners' ability to make good on their loans. There are certainly homeowners with stable income who were hit with surging interest payments on adjustable-rate mortgages, or whose home values dropped so far that they are now under water, and unable to refinance as a result. But there are slews of other homeowners laid off from all sorts of companies hurt by the economic crisis -- from automakers like
, to airlines like
and hundreds of other financial institutions, manufacturing plants, parts producers and companies of all sizes. Those jobs are not likely to come back any time soon, as unemployment climbs toward 8%, and economists predict further layoffs in the months ahead.
Sciacca references an example in the Obama plan of a family that refinances $200,000 of debt into a 5.16% mortgage from a 6.5% mortgage.
"If people are out of work, how are they going to qualify?" he says. "I'd have to be making about $50,000 to $60,000 a year to be able to afford that. If I'm out of work, I don't think I'm getting unemployment benefits of $50,000 to $60,000. If I am, I'm going to apply tomorrow."
But Obama acknowledged that the plan is not meant to help homeowners who should be renters instead, saying it "will not save every home."
Steve Wyatt, chair of the finance department of Miami University's Farmer School of Business, agrees that a program as targeted as Obama's will not provide a panacea for a troubled housing market facing issues with unemployed borrowers, unscrupulous lenders, banks on the brink of insolvency and investors afraid that any mortgage paper they touch will fade into delinquency dust.
"It's really good politics, very targeted, and going after people who look like they're going to lose their house through no fault of their own," says Wyatt. "But in reality, what's going to be bringing things down are the millions of other mortgages that aren't part of this plan. You can't cure part of the market. You either stabilize all of the housing market, or you try to help a few, which doesn't solve the problem."
Wyatt believes that while the plan has a goal of helping millions of homeowners, it will probably affect just hundreds of thousands.
Justin Pane, vice president of mortgage-modification firm Amerimod Inc., notes that previous efforts by the government -- whether FDIC chief Sheila Bair's
notion for customers of the failed California bank
, or former President George W. Bush's
counseling program -- helped far fewer homeowners than they first targeted. He calls those plans "a giant failure," with reasons ranging from the plummeting creditworthiness of borrowers, to the fact that foreclosures became more profitable than modifications, to the ineptitude of officials in charge of oversight.
For instance, says Pane, some modifications have lowered rates and brought homeowners current by tacking months of missed payments onto the principal. But if enough months are missed, the monthly payment still rises, and if the homeowner is out of work, payments are unaffordable anyway.
"Most of the homeowners I deal with want to pay their mortgage -- they want to do it," says Pane. "But most of them had no idea what they were taking out, they don't know the terms, and they just don't have the means
The new plan is far more ambitious and markedly different from the old ones. And without the government stepping in to provide some assistance, a negative feedback loop -- in which foreclosures and falling home prices cause more job losses, which only cause more of the same -- may never end. In some instances, foreclosure may remain the only viable choice, but at least there will be options for some homeowners to remain afloat.
"This isn't your father's foreclosure process," says Patrick S. Duffy, principal of MetroIntelligence Real Estate Advisors. "Left unchecked, the market could easily over-shoot and create more damage for years to come."