Homeowner Affordability and Stability Plan: Is It Really Good for Everyone?

February 19, 2009 | By: Zachary Scheidt

In the first few paragraphs, the summary attempts to assuage taxpayers who are current on their mortgages. The release explains how foreclosures typically bring down the value of all nearby homes by as much as 9%. I’m not sure exactly where this statistic is pulled from but it seems little consolation for those who live within their means and are now being asked to bankroll this initiative through tax dollars.

Broken down, the plan has three primary components:

1. Refinancing for Up to 4 to 5 Million Responsible Homeowners to make Their Mortgages More Affordable.

   This portion is targeted toward homes where a conventional refinance program is unavailable due to the falling value of the home. Since most mortgages guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE) must represent less than 80% of the value of the home, owners are prohibited from refinancing as the value has dropped to make this ratio impossible. This explains why even though current mortgage rates are historically low, many homeowners are not able to take advantage of these rates.

   It may be a bit unclear exactly how this portion will be implemented, but loosening the requirements on mortgages conforming to FNM and FRE standards may be a good start.

2. A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

   This portion is aimed at “helping homeowners who commit to make payments to stay in their home.” With a hefty price tag, this program essentially gives incentives to both lenders as well as borrowers to come to terms and keep homeowners in the house and paying their mortgages. Under the terms of the program, “an incentive payment of $500 will be paid to servicers and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.” Following the initial incentives, an additional $1,000 will be offered to pay down the principal for each year the borrower stays current (up to 5 years).

   This sounds like a win-win situation until you realize that this is YOUR tax money hard at work. Granted, there is not any easy way to deal with the mess that we are in, but using taxpayer money to reward borrowers for staying current on mortgages seems to carry a significant conflict of interest. And that doesn’t even touch on how we will define “at-risk” loans and qualify who can participate in this program.

3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac

   The final piece of the plan is to promote liquidity in the market by expanding and backing financing to FNM and FRE. The Treasury is doubling its Preferred Stock Purchase Agreement to $200 billion, and will also continue to purchase Mortgage Backed Securities from the two entities. All of this capital is in addition to the already committed funds under the TARP program.

   It will be interesting to see just how effective these measures are at keeping mortgage rates low. And then secondly, we will need to figure out whether those low rates are even applicable (depending on how effective part 1 is). Liquidity can only be significantly impacted if other market participants step in and begin trading these assets. Otherwise we essentially have a socialist capital structure with very limited free-market efficient dynamics.

The equity markets did not have a pronounced reaction to the news which may be comforting. We are at a critical juncture and any additional weakness could send indices sharply lower as support levels are broken. Traders likely mulled over the plan overnight and today’s open could be a bit volatile as the positioning begins.

Precious metals, however seemed to spike a bit higher as the plan was announced. Gold hit a six month high as the added stimulus continues to erode the confidence in the dollar. This weak dollar is masked by the fact that many other major currencies are experiencing significant difficulties, but paired against Gold, it is clear that investors are looking for safety and voicing discomfort with paper currency.

One of the biggest criticisms of this homeowner plan will most certainly be that taxpayers are paying for irresponsible actions taken by banks, and homeowners who bought houses they could not afford. It will take a significant amount of PR from the White House to overcome this resistance and prove that this plan is best for all parties involved. Obama was careful to point out that this plan is aimed at those who “played by the rules” but fell on hard times.

My question is whether those “rules” were really in existence and how we will determine who those fair players actually are. Hopefully the picture will be much clearer in two weeks when the actual details are released… But somehow I doubt it.

Disclosure: No Positions

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