Beantown Economics: Is Obama’s Housing Plan for the Good Homeowners & America? – Part 1

Dillon Zhou

The White House released the long-awaited anti-foreclosure plan on Wednesday, February 18, 2009, to the American public. Based on the purview of this solution and the reaction of many Americans, thus far, there could be a lot of backlash for the President from a significant portion of Main Street America. Many critics, from both Wall Street and Main Street, have condemned the plan for bailing out problematic homeowners who bought houses with a less than foolproof plan for paying off the mortgage – rather than putting those bailout greens toward aiding diligent homeowners who’re still paying their mortgages on time. The frustration is palpable from coast to coast.

Despite the disapproval from a large segment of the American public, there are still some good things to say about this proposed plan. The White House estimates that this plan could keep nine million Americans in their homes by allowing them to refinance their mortgages or prevent foreclosure; in other words, this plan would, on paper, shore up housing prices, stabilize neighborhoods and slow a downhill corkscrew that was “unraveling homeownership, the middle class and the American Dream itself.” At the same time, there are underlying problems that lurk underneath the benefits of this plan. The key to understanding this dynamic is to judge the facts presented by both sides, and then make an evaluation on this basis.

The Plan for Making Change

The Obama housing plan has three components. The first would help homeowners who are up to date on their payments, but who are paying soaring interest rates and cannot refinance because they do not have enough equity in their homes. The second component would help about four million Americans who are in danger of losing their homes by providing incentives to lenders who modify the terms of their loans to make them affordable for the distressed borrowers. The third component would endeavor to augment the credit available for mortgages in general by allocating $200 billion of additional financial assistance to Fannie Mae and Freddie Mac. Beyond these components, the plan also calls on Congress to give bankruptcy judges the authority to change the terms of mortgages and shrink the monthly payments of afflicted homeowners. Except for the provision that sanctions bankruptcy judges, Mr. Obama can perform practically all the other fundamental executive decisions, himself, without the approval of Congress – thus making the President personally responsible for the success (or failure) of the plan.

The problem lies in the potential cost of this ambitious plan and who’ll receive aid through this arrangement. One estimate suggests that President Obama’s plan could ultimately cost taxpayers as much as $275 billion; $75 billion in direct spending to keep the most troubled homeowners in their homes and the rest in additional financial backing for the government controlled mortgage giants, Fannie Mae and Freddie Mac. Obama’s analysts and administration officials alike cautioned that, “this plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild.”

Objections and doubt surround the question Representative John Boehner (R-Ohio) raised shortly after the housing plan was made public; “Does [Mr. Obama’s] plan compensate banks for the bad mortgages they should never have made in the first place?” Mr. Boehner asked. “Will individuals who misrepresented their income or assets on their original mortgage application be eligible to get taxpayer-funded assistance?” The answer isn’t clear at present. According to the White House, these questions will be answered on March 4, when the administration publishes detailed rules explaining how this plan will work.

The Talk at the Water Cooler

Andrew McNabb bought his Roxbury home 25 years and has never missed a single mortgage payment. This accomplishment wasn’t an easy. He and his wife of 30 years, Anne, have raised two kids while living a very spendthrift life of cutting an innumerable number of coupons and working overtime on a regular basis over the years. Now that the $787 billion stimulus and nearly $800 billion to offset the economic damage caused by the reckless lending and borrowing during the “housing bubble” years. He wonders what’s in store for him. The government has told him that he’ll probably receive a meager $15-a-week in his paycheck, as a part of the middle class tax cut stipulated under the stimulus bill.

“This is just plain unfair and demoralizing!” said Mr. McNabb, who is the assistant manager of a local hardware store. “I’ve bought a house that I could afford and have been for it without ever missing a single mortgage.

McNabb is among the mainstream of Americans who work hard, pay mortgages, borrow sensibly, and now find themselves facing the tab to bail out those who didn’t make the choices in their lives. Over the years they lived inside their means and finding creative ways of stretching their dollar. Now they’re asking: What did I do all that for? The anger, on Main Street America, toward this housing plan underscores the dangers Obama government faces in private sector salvaging. While this intervention aims to benefit everyone by preventing acute damage to the U.S. economy, they also risk encouraging rash behavior in the future. Many American economists, including some from UMB’s economics department, call this plan a serious “moral hazard.”