Will Obama's mortgage plan help?

What happened

President Obama’s plan to counter rising U.S. home foreclosure rates sets aside $75 billion to provide incentives for loan servicers to modify at-risk mortgages and encourage homeowners to keep making payments. It also injects $200 billion into Fannie Mae and Freddie Mac. Obama said the plan would help up to 9 million homeowners “who played by the rules and acted responsibly.” (The Wall Street Journal)

What the commentators said

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“With Wall Street bailouts showing little success, it’s Main Street’s turn,” said The Arizona Republic in an editorial. Obama’s “bold” plan should help both banks and neighborhoods, though, by attacking a major source of the nation’s “economic sinkhole”—falling home values and rising foreclosures. He’ll find plenty of rule-abiding homeowners who need help getting out of “mortgage hell.”

Separating the deserving homeowners from the reckless ones is the “basic dilemma” faced by all who have tried to tackle this housing crisis, said The Washington Post in an editorial. Obama’s plan “wisely” targets salvageable mortgages, rather than throwing a “lifeline to every subprime borrower.” But restricting the number of lifelines also reduces the plan’s potential impact.

The decision to leave “deep underwater” homeowners out of the plan could cripple it, said Peter Coy and Theo Francis in BusinessWeek online. Right or wrong, the “taboo” against walking away from homes worth less than the mortgage on them is fading. And because the plan doesn’t help these homeowners lower the principal they owe, it won’t solve the foreclosure crisis.

Certainly this is a major test for Obama’s “behavioral economists,” said Andrew Leonard in Salon, who posit that “properly structured policy” can steer people to do the right thing. If the “array of carrots” in Obama’s plan—say, the cash incentives for loan servicers and paying homeowners—and one big stick—the threat of judge-ordered “cram-downs” to lower mortgages—work, expect more such plans from Obama.