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.

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