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Tilting at Windmills

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February 22, 2009
By: Hilzoy

Obama's Housing Plan

I've been puzzled by the response to Obama's housing plan. There seem to be a whole lot of people who think that it's mainly designed to help out people who knowingly got themselves into trouble by living beyond their means, while those of us who were financially responsible are left out in the cold. (There's a decent sample of these reactions here. Sample: "Obama has one word for those who didn't get in over their heads during the recent housing boom and have paid their mortgages on time: Suckers!")

I just don't get this. Obama's plan is not primarily aimed at people who acted irresponsibly. Recall that it has three main parts (pdf):

(1) It rewrites regulations to allow people whose mortgages are with Fannie Mae and Freddie Mac, and who owe 80-105% of the value of their home, to refinance. These are not necessarily people who are in trouble; the value of everyone's home is going down, and it's easy for someone who got a prudent mortgage with a good chunk of money down to find him- or herself in this category. In fact, people who really borrowed more than they could afford will, in many parts of the country, be too far underwater to take advantage of this provision.

Moreover, this costs the taxpayer virtually nothing. President Obama: "The estimated cost to taxpayers would be roughly zero. While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures."

(2) The loan modification program. This costs taxpayers $75 billion, which will be used to provide incentives to banks and mortgage servicers to modify at-risk loans. This program does not require that the borrower be in default, or late making payments. People who are in trouble, but who have managed to stay current with their payments, are not left out in favor of people who are facing foreclosure. It does, however, exclude people who will not commit to staying in their home -- e.g., speculators and flippers.

(3) Increasing funding for Fannie Mae and Freddie Mac, and purchases of their mortgage securities. The purpose of this is to keep the mortgage market liquid. This step will lower mortgage rates, which will help new homebuyers and people who refinance. But it does nothing (directly, at least) for people who took out mortgages they cannot afford.

The second of these steps is the only one that could possibly be said to help people who took out loans they cannot afford at the expense of the rest of us. (The first and third are aimed at different problems entirely.) You don't have to be in default, or late making payments, in order to qualify for it. You do, however, have to be paying more than you can realistically afford.

Some people are paying more than they can afford because they knowingly took out mortgages that were too big -- perhaps counting on being able to refinance or sell their home once their teaser rates ended. Some are paying more than they can afford through no fault of their own: they lost their jobs, had unexpected health crises, etc. Some are probably in between these two camps: people who talked themselves into accepting loans that they probably couldn't afford, or could afford only if everything went right, and then things went wrong. And some were probably defrauded.

Under normal circumstances, I'd be opposed to the government stepping in to encourage banks to modify these loans, except in cases of fraud. But these are not normal circumstances. The economy is melting down, and foreclosures are a big part of the reason why. Foreclosures always impact people other than the people foreclosed on, for instance by driving down neighborhood property values. But now, of all times, they are having massive impacts on the rest of us. And the Obama plan, which does not just wave a magic wand and make people's excess debt disappear, seems to me like a good start on addressing them.

Hilzoy 1:41 AM Permalink | Trackbacks | Comments (25)

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Suppose you acted responsibly and got a loan you could afford, while your neighbor went in over his head and is now facing foreclosure. Who suffers if he's foreclosed? You both do; he's homeless, and you're living next door to a house that's been foreclosed, perhaps abandoned and run down, in any case available at a fire sale price that will drive your house's value down too. The point is, the responsible mortgage payer is already paying for the irresponsible one's acts. There is no escaping this. So let's just try to help people stay in their homes, and let home prices gradually settle to their real market value rather than drop through the floor via foreclosures.

Posted by: Fred from Pescadero on February 22, 2009 at 2:09 AM | PERMALINK

It was pretty reasonable to assume that you would be able to refinance when your teaser rate ran out (or sell). Remember, we haven't seen home price drops like this since the depression. Everybody needs to chill out and help thy neighbor. These are not evil people.

Posted by: Alex on February 22, 2009 at 2:12 AM | PERMALINK

Excellent post, Hilzoy. We might qualify under # 2 in a couple of months. Bought the house last year at a good price, healthy down payment, decent fixed interest rate, etc., but it's already lost some of it's value thanks to the current crisis. I lost my job at the end of last year. Fortunately, we have enough in savings to tide us over for a few months, but if I don't find a decent job soon, we just might be in that sinking boat.

Posted by: Michael W on February 22, 2009 at 2:20 AM | PERMALINK

I don't see how this will help anyone out here who bought in the last five years. If they bought with even a modest down payment, they'll still be upside down by at least 10%. Most of the places that are in trouble are upside down by more than 25% - and refi'ed to roll in credit card debt or no down payment.

Even if these people are making their payments - if the bank doesn't let them sell the house at a market price, the bank is at fault, not the owners.

So I don't see how this will help them.

Posted by: Crissa on February 22, 2009 at 4:33 AM | PERMALINK

I don't think that there is anything puzzling about rightwing reaction to Obama's plan. Intellectual dishonest is stock-in-trade for rightwingers, totally predictable.

Posted by: wonkie on February 22, 2009 at 5:43 AM | PERMALINK

In the days of yore a house was a structure to live in. You rented or bought, depending on your circumstances. After WWII the mortgage interest deduction made owning more attractive.

You got a 20 year fixed mortage, paid it off, and had a roof over your head, rent free, for the remainder of your life.

The market value of the house was immaterial, since you had no plans to sell. Sort of like Grandpa's shares of GM stock; they paid a dividend every year, and if the stock went up you only paid capitol gains if you sold.

My, how things have changed. . .

Posted by: DAY on February 22, 2009 at 7:41 AM | PERMALINK

...."There seem to be a whole lot of people who think that it's mainly designed to help out people who knowingly got themselves into trouble by living beyond their means...."

Do they really think this? Or is this just the updated code word for "Welfare Queen"?

Posted by: oswald krell on February 22, 2009 at 9:07 AM | PERMALINK

I have problems with Obama's housing proposal for more pragmatic reasons:

It will not work, and that money could be better spent on other more effective stimulus measures.

Why won't it work? Because subprime (high interest rates) ;oans are no longer the primary problem. We are now in the Alt-A and Option ARM territory. People aren't paying too much because they have too high an interest rate. People are paying too much because they got interest-only or negative amortization loans for which they could pay the teaser rates, but not the full rates.

The conservative estimate is that prices have to fall another 10% nationwide. Refinancing in a time of low interest rates is not going to help anyone. Cramdowns are the only thing that is going to work in that situation. All this does is weaken the support for cramdowns because "we already solved the problem".

Posted by: Walker on February 22, 2009 at 9:53 AM | PERMALINK

Can anyone comment on whether or not this mortgage assistance is available to people with mortgages on their SECOND (i.e., vacation)homes? If so, I'm sorry, but I'm resentful. Living frugally and saving up my money to buy (my first--my job requires me to live on site) a home after I retire, and watching my savings tank because of an economic meltdown caused in part by irresponsible lending and borrowing, helping people finance their beach houses, cabins at the lake, and ski chalets just sticks in my craw. I understand the social contract aspects of this, and appreciate Hilzoy laying them out so clearly today. I also understand that I will benefit if the economy recovers, and that these steps are necessary for the economy to recover. But if second homes are being "bailed out," I feel that I have the right to at least grumble a little. (I'm posting this on both threads in hopes of an answer.)

Posted by: seriously on February 22, 2009 at 9:56 AM | PERMALINK

My, how things have changed. . .

Largely, this is the fault of 70s inflation combined with the demo-graphics of the boomers. This caused a rise in asset prices that people believed to be normal, thus turning real estate into a win-win investment.

Historically, houses are horrid investments and okay capital preservers. The houses themselves are depreciating assets, like cars, and only the land appreciates. And even then, that only appreciates at about 1% above inflation. This number is taken from over a 150 years of housing prices.

This is what we are going to return to. Never again in our lifetime will we ever see the housing appreciation that we have seen in the last 30 years.

And if you think this is bad now, just wait until the boomers start selling their homes in mass to move into retirement living. Sell them to whom?

Posted by: Walker on February 22, 2009 at 10:00 AM | PERMALINK


No, this program is only applicable for primary residences. As far as being angry, I find it amusing that people are angry at individual homeowners who may or may not have "lived beyond their means"-- like we're in this just because of them. Do you understand what has fundamentally happened here? Look up "credit default swaps" and "collateralized debt obligations" to figure out who screwed and swindled whom. Actually, just read this first: http://www.time.com/time/business/article/0,8599,1723152,00.html

Posted by: zoe kentucky on February 22, 2009 at 10:37 AM | PERMALINK

, I find it amusing that people are angry at individual homeowners who may or may not have "lived beyond their means"-- like we're in this just because of them.

There is a lot of blame to go around here, though it is not clear that any of it is productive.

CDOs bear a lot of responsibility because, instead of mitigating risk, they actually amplified the defaults. But the CDOs would have probably been fine, if home loan defaults stayed in historic norms. They didn't because people bought homes that were more expensive than they could afford.

Some of this is the bank's faults as well. They had no business lending money like this to people they knew damn well could not pay it back. Your average American is too mathematically illiterate to understand basic statistics, much less complex financial calculations. If a bank person tells them "you can afford it", they will believe them. And that is what happened here.

But the American people believed them because they thought that they had to. As someone who was (and still does) rent during this time period, I can attest to the vast pressure that society was putting on people to buy homes at any cost. "Buy now, or be priced out of the market forever!" And people still believe that the solution to all our problems is get house prices increasing again. Hence all of these stupid attempts by the Obama administration to set a price floor when houses still have another 10% to fall at a minimum.

Posted by: Walker on February 22, 2009 at 10:52 AM | PERMALINK

Zoe Kentucky, I thanked you on the other thread and I'll thank you here, too.

Posted by: seriously on February 22, 2009 at 10:53 AM | PERMALINK

I was at a party last night where this subject came up. A woman who works at a bank (I'm not sure in what capacity), insists that this is rewarding bad behavior. I said that I understand the basic moral hazard argument but that surely she didn't feel that everyone that was in trouble was guilty of poor judgment and should lose their homes did she. She did.

I left the party quite angry and I'm still in a very bad mood.

Posted by: rmp on February 22, 2009 at 10:59 AM | PERMALINK

I'm a person who had to refinance my mortgage after my divorce because it was part of the divorce agreement to get my ex-husband's name off the mortgage. However, because the divorce meant that I, a stay at home mom had to go back to school to get training, who had a eight month baby at home at the time, and whose child support for my four children did not COVER the costs of child support and school loans plus mortgage food and other bills, I went into deep debt and could not afford to pay back everybody in full, even though I paid everybody a monthly installment each month. THis ruined my credit. The mortgage I was able to refinance was one of those for people with bad credit. I was told that my arm would go up in a year's time, but if I paid on time, they would let me refinance at a lower rate that would not change. They lied. The guy rushed me through the small print. BUt I knew I had no choice but to take this mortgage. I have been paying it faithfully for years. But I got behind a month when my son had some hospital bills that would not be covered by health insurance. Then, I lost my job. I am now three months behind, but I just got a job. I pay faithfully, but I cannot afford to make up the three months. I cannot help my son with college, and his father refuses to pay. What do you do when you know you can't afford to refinance, live in a depressed area where nobody will buy your house (I forgot to mention that when these problems started, I put my house on the market for over a year)? How am I a crook or intentionally irresponsible?

Posted by: sophia on February 22, 2009 at 12:43 PM | PERMALINK

My husband and I are responsible homeowners; we bought a home we could easily afford and we over-paid our mortgage every month so that now we can pay off a 30 year mortgage in only 5 years. Furthermore, our house appraised at twice its purchase price, so even with a devaluation in housing prices we will break even or come out slightly ahead. We do not begrudge most people federal assistance on their at-risk mortgages, as it is good for all of us over the long run, and I don't see how we avoid the social costs if we let people lose their homes and possibly become homeless. But the biggest reason I support the mortgage rescue is that many of these homeowners have CHILDREN. When I was 10 years old my father lost his business and our house in bankruptcy, and it is not an experience I would wish on families with kids, regardless if their parents may or may not have made unwise decisions. My older brother found my father crying on the basement steps when it became clear he was losing everything, and it is an image that I think made a lasting and negative impact. A household and family business going over the cliff is a long, drawn-out and painful experience and kids are very sensitive to what is occurring.

Posted by: Varecia on February 22, 2009 at 1:16 PM | PERMALINK

Unsaid is whether or not those who refinanced with cheap money and used the proceeds to buy bass boats and flat screen t.v. sets and wraparound leather couches are worthy recipients of this bailout.

Posted by: michael murphy on February 22, 2009 at 1:41 PM | PERMALINK

All this emphasis on who deserves to get bailed out seems misplaced to me. Banks and AIG got bailed out, not because they deserved it -- they least of all, because unlike most consumers the banks went into these shady financial arrangements with a lot of information and expertise -- but because the economic effects of their failure were unacceptable. The same is true here, but there is also the moral effect of allowing families (including children who had nothing to do with their parents' bad decisions) to fall into foreclosure, bankruptcy, and in some cases homelessness. Bailing out homeowners seems like a much more straightforward good than bailing out banks. And yet, it seems to be getting a lot more criticism on supposed grounds of "fairness" and what people "deserve." I can only speculate that this is mainly because most people don't understand as much about the mortgage-backed securities debacle as they do (or think they do) about personal finance, and they can't muster the same level of moral outrage over something they can't understand.

Posted by: The Fabulous Mr. Toad on February 22, 2009 at 3:16 PM | PERMALINK

Nobody really expected Republicans to praise Obama's plan, did they?

If you consider the amount of money which has gone to banks (not all will be recovered), and the amount in tax breaks for small businesses (in the stimulus bill) and the amount which will go to businesses when they get money for stimulus bill projects and the crap homeowners have gone through, then it makes perfect sense to help them stabilize their financial lives. It just also happens to be the core issue of the financial crisis the world is facing and if we don't deal with it, then all H*ll breaks loose everywhere.

But then, I guess Republicans wouldn't mind the disaster getting worse when there's a Democratic president. They're just such swell people. /s

Posted by: MarkH on February 22, 2009 at 5:11 PM | PERMALINK

What kind of bullshit is this "underwater" stuff?

Let us distinguish between actual value and market value. If you bought a house as a home, then you thought the house was worth the payments and the actual value to you is that of a home to live in. Many homeowners are thrilled that the market value of their homes is plummeting as they hope their property taxes might also go down.

On the other hand, if you bought your house as an investment, then you are a speculator who gambled, and why should renters and home buyers who want to live in their homes subsidize your investment? Clearly it was wrong to assume that house prices would always rise. Clearly it is just as wrong now to assume that housing prices will always fall, or stay the same, and never start rising again. People who bought houses as an investment should just hang on to them for the long term, as stock holders are usually advised. Should we subsidize stock holders whose stocks fall? Ridiculous.

Posted by: Luther on February 23, 2009 at 1:41 AM | PERMALINK

This seems to put the poorest people --the renting class-- further behind at the expense of bailing out a small segment of the middle class (some through no fault of their own due to job loss or predatory lending, others who took out seconds for frivolous consumption and lived greater than their means). Why? because it artificially inflates home prices (or fails to allow natural deflation of hyper inflated housing prices, that have far exceeded average wages). I am in my thirties, and have never owned a home, and have $60k down payment saved up over the last decade and am ready to buy...but now the prices will not go down enough, perhaps, for me to do so on my income.

Posted by: Susan on February 23, 2009 at 2:16 AM | PERMALINK

On the other hand, if you bought your house as an investment, then you are a speculator who gambled, and why should renters and home buyers who want to live in their homes subsidize your investment?

Yes, clearly no one ever sells their house unless they are a speculator. They only buy if they plan to live there for the rest of their life, because we all have companies that offer lifelong employment, just like people did back in the good old days. No one ever loses their job and has to move to another city to find a new one, no one ever gets divorced, no one ever has unforeseen medical expenses that render them unable to afford their current house.

Obviously, anyone who experiences any of these things should have had the foresight to expect them and been a renter, or else they're a speculator who shouldn't be helped, right?

Posted by: Redshift on February 23, 2009 at 2:50 AM | PERMALINK

When the prices were going up then also it was NOT NORMAL, but nobody wanted to intervene as the going was good .. so why come crying to mother when things are on the way down..

Why should the prudent home investor who felt the prices were just not right pay a higher price because some fools invested unwisely and they are now finding the value of their investment going south.. let the houses find its bottom, so that the prudent investor gets to benefits for his foresight

Also why should the tax-payer be punished for unwise lending and unwise borrowing .. EVER HEARD OF YOU TAKE THE RISK YOU GET THE REWARD..

Posted by: killben on February 23, 2009 at 5:46 AM | PERMALINK

killben, there were 'prudent investments' even when prices were higher--you just had to have the balls to look for them where they actually were.
And we are the United Sates of America, not the Tough Luck You Lose States of America. When there is a threat that involves enough of the population we do what's best for the entire nation. When 1 in 10 households are in foreclosure I think we have a problem that threatens all of us in some way.

Posted by: Varecia on February 23, 2009 at 9:32 AM | PERMALINK

Not that this will be posted (I'm reasonably certain it won't here), but we are continuing to make the same mistakes that got us buried in debt. We are assuming something that doesn't exist, that people are entitled to a mortgage.

To say that people are entitled to proper shelter is one thing, to say that someone who for WHATEVER REASON cannot pay for their house is entitled to stay there is quite another. There is a glut of available homes for rent right now. Rent prices are plummeting because housing supplies have skyrocketed in those 4-5 states where the mortgage crisis really exists. (California, Arizona, Florida, Michigan mostly).

A person that cannot make their mortgage payment as they agreed must understand that there are other options available for proper shelter. These options are much more affordable (renting) and will go further towards righting their financial ship than re-burying themselves in debt. Debt-to-income ratios are astronomical for a foreclosure to occur, as that is a persons most important debt. Reducing one's debt to income ratio to 50% instead of 65% with taxpayer dollars (yes, taxpayers are paying for the closing costs of loan modification, not mentioned here of course) doesn't solve the problem. It puts a band-aid on a wound that requires 50 stitches.

Posted by: Dylan on February 23, 2009 at 4:24 PM | PERMALINK



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