Make no mistake: President Obama’s $275 billion foreclosure-prevention package is expensive, risky and unfair to homeowners who played by the rules all along.
But does anyone have a better idea?
Whatever else can be said of it, the Obama plan marks the first serious attempt to strike at the root of America’s economic crisis – the sharp decline in home values that has sparked waves of mortgage foreclosures and crippled the country’s financial institutions.
First, he’d commit fully $200 billion to government-backed lenders Fannie Mae and Freddie Mac – permitting them to refinance mortgages, at current rock-bottom rates, for certain homeowners whose reduced home values mean they otherwise wouldn’t qualify.
He’d also pressure banks getting bailout money to cut interest rates for struggling homeowners – and front another $75 billion to help them do it.
The purpose here is as clear as it is urgent: Stop, or at least slow, the downward spiral of home values by preventing as many foreclosures as possible – thus shoring up Wall Street’s mortgage-backed assets and saving neighborhoods from the general decay that accompanies abandoned properties.
The plan, of course, comes with risks:
* Most basically, it rewards irresponsible behavior. Many people in line for help had no business buying a home in the first place – and were often plain dishonest in procuring a loan.
* It’s also unclear how much reworking mortgages actually helps. It turns out that more than half of the loans modified last year by large banks defaulted again within six months.
If that pattern holds, Obama’s relief plan may only add to Wall Street’s uncertainty regarding the value of their mortgage assets.
* The administration also plans to push for a law allowing bankruptcy judges to unilaterally rewrite distressed mortgages. If that happens, look for loans to become much harder to get as banks hedge their bets against court-imposed losses.
Clearly, the country is headed into uncharted waters. But, given the urgency of the moment, Obama’s plan seems prudent and reasonable.