The Obama Housing Plan, the Markets and What It Means to You

This week, President Obama unveiled his plan to help struggling homeowners stay in their homes. The plan, dubbed the “Mortgage Modification Plan”, offers incentives to borrowers and lenders to keep mortgages current.

Speaking this past week in Mesa, Arizona, Obama said the plan could help as many as 9 million homeowners stay in their homes by modifying loans or refinancing them into new mortgages. Obama also stated he would support rewriting bankruptcy laws to allow judges to reduce mortgage balances on outstanding mortgages to fair market value provided the debt is paid in accordance with a court ordered plan.

Part of the $275 billion plan will allocate $75 billion to match reductions in interest payments lenders make to reduce borrower’s payments so the payment amount doesn’t exceed 31 per cent of the borrower’s income. Under the plan the lender would be responsible for reducing payments so payments don’t exceed 38% of the borrower’s income; the government and the lender would jointly be responsible for reducing the payments to no more than 31% of the borrower’s income.

Treasury Secretary Geithner said, “The plan is “an absolutely necessary part of the recovery” and will “arrest this very damaging spiral” in home prices.” Unfortunately, as he has done previously, he did not release details of the plan; instead he noted plan details would be released March 4. (Bloomberg February 18(source for previous 3 paragraphs))

The plan was met with a great deal of skepticism, and even outrage. Note the response below by Rick Santelli:

Others were slightly more subtle, but had the same take on the plan.

This week Amhurst Securities Group Analysts stated the mortgage modification plan mostly aids those who ‘really stretched to buy their home and lied the most about their income’. Amhurst is a securities trading firm that advises homeowners about home debt. (Source: Bloomberg February 20, 2009)

In the meantime the markets continued to sell off.

The S&P 500 is now at 770 and the Dow Jones Industrial Average is at 7365. The Dow has now eclipsed the November lows while the S&P 500 has not – this could be a sort term bullish sign. Long term however the news hasn’t changed much and ultimately it’s my belief the market has to go lower.

Let me get back to the housing market discussion for a minute, even assuming you agree the government should be involved in these matters, the new administration’s plan is simply not enough.

Lets again refer to a graph I included in my first quarter market update:

As you can see from the chart, it’s my belief we’re in “the eye of the storm”. The next set of rate reset mortgages start resetting rates later this year with rate resets accelerating in 2010 and then again in 2011.

As you can see from the graph, this plan (in my opinion) isn’t enough to meaningfully affect the housing market. The numbers are simply too large.

To continue throwing taxpayer money at this is in my mind is ludicrous. We don’t have the money for one thing and the government is throwing good money after bad for another. The government is once again rewarding bad behavior as Mr. Santelli so enthusiastically stated and letting those who’ve behaved properly pick up the tab.

In spite of the new administration’s intent, there is still more downside in the housing market and still more foreclosures to come. This plan, like Bush’s TARP I and Obama’s stimulus aka spendulus programs, simply delay the inevitable.

And what about funding all of these programs? Who is loaning us the money?

Secretary of State, Hillary Clinton was in China this past week, to try to sell the Chinese on continuing to buy US Debt. “We are truly going to rise or fall together,” Clinton said (speaking of China). “By continuing to support American treasury instruments, the Chinese are recognizing” that interconnection.

The Chinese responded last week saying it plans to keep buying Treasuries, adding that future purchases will depend on the preservation of their value and the safety of the investment.

Sounds to me like one funding source, the largest one may soon dry up.

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