Obama's Savior-Based Housing Plan

The White House tries to bring salvation to struggling homeowners.


In the span of just over a week, America has witnessed the debunking of "savior-based" economics. That, you might have heard, is the theory that posits all you need for smart economic policy is to assemble a bunch of indispensable brainiacs in Washington and let them work their magic. (Hollywood has its own version of this theory, which is why we end up with the "great cast, bad movie" phenomenon. See "Ocean's Twelve" or "Ocean's Thirteen." Rather, don't see them.)

First came Treasury Secretary Timothy Geithner's tightly-wound presentation of a banking bailout plan that left Wall Street both somewhat confused about its details and somewhat terrified that the fuzzy thing wouldn't work. Next, came President Obama's signing of a $787 billion "stimulus" plan where most of the stimulus may actually kick in after the economy starts to recover. (Too little boli, too many Tic-Tacs in that one.) And now comes the third leg of the chair, a $75 billion housing bailout plan (though it could surge to $300 billion or more). It will attempt to help some homeowners refinance, assist others in lowering their monthly payments, and reduce mortgage rates.

The Obama plan is certainly more ambitious and costlier than many expected, especially in its use of Fannie Mae and Freddie Mac to influence the mortgage market. But will it all work? An analysis by IHS Global Insight concludes that it will help prevent some number of "preventable" foreclosures. So that's something. But between 10 million and 15 million homeowners are underwater and that number is growing. Who knows how many will walk away from their homes and to what extent the Obama plan will help? IHS Global just shrugs. Me, too, especially since the plan, while potentially lowering mortgage interest rates, doesn't make a clear provision for reduction in the principal. That's the real killer.

But it is certainly debatable whether we should even be trying a savior-based plan to prevent foreclosures. Do we need Uncle Sam to  "save" homeowners who have sinned against the gods of financial prudence? Here's how the folks at Weiss Research see things after examining the Obama plan: "Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage. ... Delaying and dragging out the downturn by artificially propping up home prices will arguably work against the market healing."

In the same vein, former Bush economic adviser Lawrence Lindsey has suggested an immigration program that would give a provisional green card to anyone who invested at least $10 million in residential property and held it for five years. And bond guru David Goldman of the Inner Workings blog relates that he's been getting inquiries from Chinese investors interested in the U.S. housing market. He also highlights what is easily the worst aspect of the Obama plan, the "cramdown" provision which would allow judges to modify mortgages. "Allowing judges to show generosity to homeowners ... and keep them in their homes makes the core assets of the banking system uncertain. ... Cramdown probably is responsible for the deterioration of subprime AAA’s during the last few days." That's what happens when you toss 1,000 years of contract law out the window in the middle of a global financial crisis.

But the plan falls short of what some experts were pushing for, in both elegance and scope. For instance, Alan Blinder, the former Fed vice chairman, wanted a $400 billion, 21st-century version of the New Deal-era Home Owners' Loan Corp, which bought mortgages from banks and then issued more affordable new loans to struggling homeowners. Then there's Glenn Hubbard and Christopher Mayer of the Columbia Business School who advocated a $338 billion plan to allow all mortgages on primary residences to be refinanced into low, low, low 30-year, fixed-rate mortgages. And independent investment strategist Ed Yardeni and Carl Goldsmith of Delta Asset Management proposed fully nationalizing Fannie Mae and Freddie Mac and then offering a trillion bucks worth of 30-year, fixed-rate mortgages at 4 percent to all qualified borrowers to buy a new or existing home.

Maybe one of these pricey plans could have turned around the housing the market and the economy. Maybe not. But Obama's surely won't. And that's not really the intent, apparently. It's all about stabilization. As the president himself said, "If we act boldly and swiftly to arrest this downward spiral, then every American will benefit. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. ... And by bringing down the foreclosure rate, it will help to shore up housing prices for everybody."

"Arresting downward spirals." "Preventing the worst." "Shoring up prices." Well, you can't exactly accuse Obama of overhyping the benefits of this proposal. Nor should he, given the pessimism found in current economic forecasts. The Fed now thinks that the unemployment rate could climb to over 9 percent this year and next, and still be above 8 percent in 2011 -- some four years after the recession began. And the Philadelphia Fed surveyed 43 forecasters who predicted that the unemployment rate will rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010.

So there are no miracles in any of this. No quick turnarounds. No light at what appears to be a very long and treacherous tunnel. As Bill Murray's weatherman character put it in Groundhog Day,"I'll give you a winter prediction: It's gonna be cold, it's gonna be grey, and it's gonna last you for the rest of your life." At least, it kind of feels like that. (This is probably a good time to point out that just over a year after President Reagan signed his revolutionary economic plan, the economy shifted into high gear and never looked back. But no Morning in America around here anytime soon.)

This is Obama's multi-trillion dollar economic recovery plan, Obama's multi-trillion dollar choices for economic salvation. It has government spending taxpayer money like never before to boost the economy. Conservatives says it's too much (and wrongheaded), liberals too little (and weak-hearted.) But no more blaming former President Bush. It's Obama's housing crisis, his banking crisis, his economic crisis.