Instant Reaction: Cautiously Optimistic

Even a blind squirrel can occasionally find a nut. There are remarkably few right-wing Democrat/anti-government Republican fingerprints on the speech that Obama just gave and on the plan summary on his blog. (Maybe the real purpose of the Geithner plan was to serve as a "monkey trap" to keep them all busy while the "reality-based community" worked on the real problem? We can only hope he's that smart.)

The documentation on this stinks, it reads like stereo instructions with at least one missing page, but let me see if I can summarize this a little more clearly. The Obama Plan sets a target price for mortgage payments at 31% of income, which is an unbelievably good and very welcome breath of fresh air, in a world gone mad where brokers were telling people that paying 50% of your income for your mortgage was normal and sustainable. People are paying more than that (and therefore, as we've always known people who are paying more than that would do, going broke) for one or more of several reasons: they got scammed on the value of the house, they got scammed on their loan terms, or the economy went into the tank and their income fell; we're going to save as many of those people as we can. People in that situation will have several options:

If (and only if) the amount owed on the house is no more than 105% of what a (hopefully more honest) appraisal of the house is worth, and they have enough income to afford that much house via a 30 year fixed-rate mortgage with payments of no more than 31% of their income, the government will refinance their mortgage for them, through the recently re-nationalized Federal National Mortgage Association and Federal Home Loan Mortgage Corporation: no points, no fees, semi-automatic application process. I'm all in favor of it, and am hard-pressed to imagine anybody objecting to this part.

If they owe more than 105% of the value, or don't have enough income to qualify, the government will "create incentives" for the company that's currently servicing their loan to renegotiate on the following terms. The mortgage servicing company finds them some way to refinance it as a 30-year fixed-rate mortgage at any payment, and the government directly subsidizes the difference between that payment and 31% of their income. And if that isn't enough incentive for them, the President may have just said (the language isn't clear) that agreeing to do this for all the loans they service is a condition of those companies receiving any government aid of any kind? OK, but I have some serious reservations about this part of the plan. First of all, for about half of the loans in question, what he's asking the mortgage servicing companies to do is basically flatly illegal, because the mortgages were written with an explicit clause in the fine-print that rules out any renegotiation on any grounds. There's nothing in here that explains how they're supposed to get around that.

Secondly, it really does reward people who bought way more house than they could afford, speculating that they could refinance bring their payments down later by reapplying their "certain" future home equity as down payment. There are enough such mortgages out there that I'm far from sure that the $75 billion he's estimated to be available is enough. The main protection we've got against that is one that he doesn't promise, only promises to "support," and that's cram-down through the bankruptcy process. Let's say you can only afford a $150k mortgage, by any honest measure. But you bought a $250k house, on an optional-payment adjustable rate mortgage (option-ARM) that let you only pay what the mortgage would be on a $150k house for a while. You did this because you were just that sure that a year later, the house would actually be worth $350k or $400k, so you would take out the equity and reapply it as a down payment. The Obama Plan basically lets you have that money, or more precisely the benefit of that money, for free. Only it does so by, in effect, repricing your house down to $150k, thereby bringing down the average value of all the houses in your neighborhood. I'm of two minds on this. It's obviously morally wrong for you to have made this deal, and for the taxpayers to be on the hook for it is reprehensible. On the other hand, most people in this situation didn't come up with the idea on their own, they were hard-sold into it by even more corrupt and reprehensible mortgage lenders who never intended those people to get to keep their houses, they only wanted to scam the system for their loan origination fees and then split with the money. And it's not as if the information that this was a scam was made widely available early enough, often enough, or loud enough for it to be fair to have expected them to know that it was a scam. On the other hand, I get the sense that the threat to cram-down the value of the house through bankruptcy court order is just a poison pill, that the intent is to create that as a threat, not to actually have it ever happen, just to create yet another incentive for the mortgage servicer to find some way to refinance ... or else.

So I'm not sure it's going to work, especially not without a bunch of details that we were just told may not be available for another two weeks. But I'm cautiously optimistic, if for no other reason than this: he didn't say the words "public-private partnership" and he didn't pretend that there's a ton of "private investment" out there waiting to be "attracted" to solving this problem for us. So, against all expectations, he may actually pull this one off. And, as I said last night, if he gets this one right, it may not matter that he screwed the pooch on the financial rescue plan and the stimulus bill. Maybe I can renew my lease this spring, maybe I can spend some money on some things I want to buy that would (indirectly or directly) provide income to some friends and acquaintances of mine, maybe I don't have to plan for the very-near term collapse of the US economy. We might just make it through this one with no more than "normal" recessionary damage. That it's at least possible is rather substantial relief.