Obama’s Homeowner Rescue Plan Pushing on a String

February 18, 2009 - 4:40PM

(bettertrades) - On Wednesday, the White House released details for its latest attempt to stabilize the housing market. President Obama’s plan calls for a $50 billion program to help homeowners with Fannie Mae or Freddie Mac conforming loans refinance their mortgages at lower rates. Additionally, a $75 billion homeowner stability package is being formulated where the government would help bring monthly mortgage payments down to 31% of income.

Washington's latest plan represents yet another attempt to put a band-aid on a bullet hole.

Earlier in the day, the Commerce Department reported January housing starts fell to their lowest point post-1945. New home starts dropped 16.8% to a seasonally adjusted annual rate of 466,000 last month and are down 56% in the past year. Building permits fell 4.8% to a seasonally adjusted annual rate of 521,000, another record low.

Rising foreclosure rates are exacerbating the dilemma for new construction as older homes flood the market.

Meanwhile, declining interest rates spurred a 45.7% increase in mortgage applications last week, according to the Mortgage Bankers Association. Existing loan refinancings soared 64.3% as homeowners rushed to take advantage of lower rates.

Falling home prices lie at the crux of the global financial meltdown. Leveraging up by homeowners and the securitization of ABSs and CDOs became exorbitantly bad bets once the inflated housing market bubble burst.

The pain felt by homeowners facing foreclosure is real. Home prices must come back to a sustainable market equilibrium and, unfortunately for those affected, there is no quick fix that can be proffered by Washington.

The Federal Reserve has lowered interest rates dramatically, successfully stemming the tide of an epidemic of resetting ARM foreclosures. But lower interest rates are not a panacea.

Banks are working with homeowners on a case-by-case basis to try and keep existing homeowners in their homes. But not all homeowners qualify for a restructured homeowner contract.

Suggestions out of Washington to put an artificial floor under falling home prices are absurd. Other suggestions, like sending arbitration disputes into court raise social questions that have no easy answer.

If judges are allowed to determine mortgage contract terms, it raises the issue of moral hazard where the need to fix the current problem would likely have negative effects for future homeowners. Not to mention the fact that homeowners who are responsibly making their mortgage payments get no direct help from housing stability initiatives. The fact is we’re all in the soup together and existing homeowners lose out when a neighbor is forced into foreclosure, regardless of their situation.

During Wednesday’s trading session, Treasury yields rose after the Obama Administration revealed their plans to help at risk homeowners. The benchmark 10-year note, which is closely correlated with mortgage rates, rose to 2.677%.