Thoughts on Obama's Mortgage Bailout Plan

From Calculated Risk, who read the summaries. Here he points to a specific portion of the proposal.

...For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.

This is not so good. The Obama administration doesn't understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation.

...This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake

...Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

A larger problem, IMHO, is that all this will be financed by tax dollars downstream.

More, from Malkin's site--questions advanced by the House Republicans:

1. What will your plan do for the over 90% of homeowners who are playing and paying by the rules?

2. Does your plan compensate banks for bad mortgages they should have never made in the first place?

3. Will individuals who misrepresented their income or assets on their original mortgage application be eligible to get the taxpayer funded assistance under your plan?

4. Similarly, will you require mortgage servicers to verify income and other eligibility standards before modifying mortgages?

5. What will you do to prevent the same mortgages that receive assistance and are modified from going into default three, six, or eight months later?

6. How do you intend to move forward in the drafting of the legislation?

And, of course, the Big Question: Do you REALLY think that you can prop up housing values?