Issue of the week: Obama’s plan to stave off foreclosures

With housing prices still in free-fall and millions of borrowers at risk of losing their homes, Barack Obama this week laid out an ambitious, $75 billion mortgage-relief package, said Michael Fletcher and Renae Merle in The Washington Post. The president’s plan “will supplant a series of government foreclosure prevention efforts that have languished and failed to stop the historic slide in home prices and spike in foreclosure rates.” Larger than expected, the plan would allow homeowners struggling with high monthly payments to refinance into cheaper mortgages, even if their homes are worth less than their loan amounts. And it creates a system of rewards to lending institutions that modify loans to borrowers at imminent risk of foreclosure. Obama said the plan, which could keep up to 9 million borrowers in their homes, “will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans.”

The White House is offering mortgage lenders a combination of “carrots and sticks” to win their cooperation, said Edmund Andrews in The New York Times. The biggest carrot is a proposal to subsidize borrowers’ interest payments, with the government and lenders sharing the cost. The administration contends that subsidies would cost lenders far less than buying troubled loans outright. The biggest stick is pushing for legislation “that would give bankruptcy judges new power to restructure mortgages and reduce a borrower’s payments.” Bankers vehemently oppose giving judges the power to “cram down” loan modifications, “warning that investors will stop financing mortgages if they know that a judge can unilaterally change the terms.” If banks want to avoid a court-ordered cram-down, Federal Reserve Gov. Elizabeth Duke said this week, they should “consider options like allowing borrowers the chance to remain in their homes as renters rather than owners.” Otherwise, the government will have

to intervene.

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It’s a little late to ask banks to carry the ball, said Brian Grow in BusinessWeek. The Obama administration is intervening in the mortgage market because the banks have done nothing to hold back the “terrifying wave of home foreclosures.” In fact, “banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem.” Consider Hope for Homeowners, a voluntary refinancing program that banks said would save 400,000 homeowners from foreclosure. So far, it has “produced only 25 refinanced loans.” Rather than come up with a systematic solution to the mess, the banks apparently have decided to “pin their hopes on an unlikely housing rebound.”

Bankers aren’t the only ones who need to lower their expectations, said John Wasik in Bloomberg.com. For a decade, borrowers assumed that because housing prices were rising at a double-digit annual clip, they would do so in perpetuity. “Our post-bubble era demands a new lens through which to view homeownership.” Don’t assume that the value of your home will rise steadily. More likely, “it will barely track inflation.” In short, we need to stop thinking of our homes as “investments” and instead think of them as, well, our homes.