Is the New Obama Plan Simply Prolonging the Pain?

There are many criticisms of the Obama administration's plans to fix the housing market. Here is an overview of one of those criticisms that was published in the New York Post.

A recent article in the New York Post suggests that President Obama’s mortgage rescue plan is simply prolonging the pain for the mortgage industry and the homeowners who find themselves in financial troubles. The author of the article – Stephen Meister – also claims that the administration’s plan to boost the housing market sticks the taxpayers with billions of dollars that will inevitably be lost. That’s on top of the billions of dollars that have already been lost in the mortgage industry.

Meister explains that the housing market has to find its own “bottom” and letting the federal government step in with this new plan to delay foreclosures is only going to make things worse. He says that the previous efforts to do this have failed and the current efforts are not going to be any better.

The first effort by the administration included a plan to allow delinquent homeowners to modify their home loans with the bank that issued the loan. This was designed to halt the number of foreclosures that were happening at an alarming rate. Unfortunately, holders of second mortgages made this plan difficult and something else was needed. As such, the administration paid them to move along. First-time homebuyers with low income were also given an $8,000 tax credit to help motivate them to buy a home and stimulate the sales in the housing industry. The administration also offered incentives to banks and qualified buyers to do “short sales,” which means that a home is sold and the bank agrees to take less money for it than what is owed.

But Meister says all of those plans have failed. Only about 15 percent of the four million home loan modifications have actually happened. He also says that billions of taxpayer dollars have been doled out to first-time homebuyers even though those people would have purchased homes anyways. Also, the foreclosures have still piled up. The only difference the plan made was that those homeowners who have been foreclosed upon have received a few extra months in their home. All of this and home prices remain stagnant because of the saturation of foreclosed homes on the market.

While we find ourselves in the same position as when these plans started, the federal government has pumped more than a trillion dollars into the housing market. As a result, the mortgage rates came down significantly for awhile, but that did not stimulate home sales. The upper markets are still waiting for the housing bottom which has not arrived yet and many overextended homeowners still cannot refinance their homes.

The new plan offers government subsidies for homeowners with mortgage balances of up to $729,750. The plan will pay banks who reduce those principal balances to 97.5 percent of the actual home while offering more affordable payments to the homeowner. The affordable payments will be based on the individual’s income and should be no more than 31 percent of what they make. The administration plans to pay these “forgiving” banks between 10 and 21 cents for each dollar of principal that is forgiven.

Do you think this plan might actually work? Or is this just another bad attempt that will end up doing more harm than good?

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