In a recent blog entry by US News & World Report Blogger, James Pethokoukis called: Obama's Savior-Based Housing Plan you can find a summary of different economic stimulus plan solution proposals from different economists, analysts etc as well as a summary of the President Obama Housing Recovery Plan. Through analysis, these plans range from slowing the economic and housing crisis, which seems to be what Obama is aiming at, to turning around the slide for the whole economy.
Will "arresting", as Obama put it, or slowing the housing and economic slide be enough help fast enough to prevent a serious US and World economic meltdown? Or, do we need to impact things with a faster means to go for a complete turnaround in one full swoop to help stave off such a catastrophe?
The Economic Recovery Plans Summarized by Pethokoukis
- Alan Binder's suggestion that an entity, presumably federal, purchase mortgages and turn around and rewrite those mortgages to more affordable payments.
- Glenn Hubbard and Christopher Mayer's proposal to refinance all primary resident home mortgages to lower - very low - interests at 30 year terms.
- Ed Yardeni and Carl Goldsmith suggest that Fannie and Freddie be allowed to offer home purchase mortgages at 4% to all qualified buyers.
These recovery plan suggestions are some of the many that are out there. The following is one that I have not seen yet and warrants some analysis.
Problems With The Obama Housing Recovery Plan
There are some problems and some potentially good things from the Obama Plan, which we aren't going to summarize here. You can find these summaries all over the Internet. What we are going to talk about is home foreclosures and how to get more people buying homes.
Solution To Turn The US Housing Slide Around
Obviously, there are a fair amount of current home buyers who are in a bad spot with their mortgage: those who have already had their home foreclosed, those who are in foreclosure now, and those who are headed that way. Some estimates of these numbers total as high as 15 million homes/families are affected by their current mortgage.
The good news about this group of people is that given a second chance at another more affordable mortgage most of them would get in line. Many of these homeowners weren't high credit risks before they ran into problems within the past few years. However this large number of people, who could be in the pool of home buyers moving forward, under the current FHA, Fannie Mae and Freddie Mac underwriting system are locked out of the home purchase market for 2-5 years.
If there were a tweak to the home mortgage underwriting system used by FHA, Fannie Mae and Freddie Mac to allow this pool of home buyers to qualify to purchase a new home - with some economic penalty - then we could see a lot more homes being purchased and moved off the REO books of the banks.
A Penalty To Get A Mortgage After Foreclosure
The economic penalty that a foreclosure loan applicant could be that they get a loan at a higher rate than a fully credit, income and asset qualified home buyer. The underwriting system already delineates differences in qualifications of mortgage applicants sent through the system so this type of adjustment wouldn't take much to implement.
Banks on the same hand already make pricing adjustments to loans products based on credit approval levels provided by the automated underwriting systems of FHA, Fannie Mae and Freddie Mac. So again, making adjustments to the loan product system wouldn't be hard to implement.
If it were the case that there were more buyers it would mean more homes sold, which would allow banks to more easily sell the homes on their REO lists. The banks could see higher profits from these higher interest mortgages while lowering their projected costs due to managing a huge REO list and having their money being tied up in dead assets.
Penalty For Foreclosure Goes Away After Clean Mortgage Payment History
An option for the higher interest paying homeowner is that after 5 years of solid payment history the interest rates could be reduced by a percent or two to reward to good payment history. Or these homebuyers could refinance when they actually qualify for a lower rate mortgage in a few years, provided the market responds favorably - which presumably it would if the free market economic rules play out and activity and sales and competition cause home prices to at least stabilize or reverse and actually go up.
This Housing Crisis Solution Slows - Stops - Reverses The Slide
An increased number of home buyers could get the market moving quicker. Sure lower home values would follow with more foreclosures, but aren't values already heading there or already there in many parts of the country anyway. And how far could they drop if there were more buyers in the pool who could purchase the loan.
One of the problems that is mentioned about the Obama plan is the failure in the plan to require principal reductions. This proposal to let the homes go to foreclosure and then be subject to being resold at a higher interest rate loan to a "foreclosure credit homebuyer" could offset the real loss by the bank and with more homes being moved, home prices wouldn't drop nearly as much as there would be competition back in the market.
