Sunday, February 22, 2009

Obama's housing plan

Back when housing prices were expected to go up forever, home ownership was pushed by everybody. Lenders pushed adjustable rate mortgages to get everyone through the door, knowing that the government-backed mortgage agencies, Fannie Mae and Freddie Mac, were legally obliged to buy up all mortgages under $417,000. The primary mortgage lenders made their money on commission -- and it didn't matter to banks or investors that the borrowers might not be able to pay: the ever-increasing value of homes made the whole enterprise profitable.

Suffice it to say, the scheme is no longer profitable. People who bought high-risk mortgages -- notably, on the advice of those selling them -- have since watched their home values plummet, and additionally are more likely to now be unemployed. As as result, many people can't afford their homes, and are being thrown out. The financial industry seems to favor this outcome, with notable personalities like Rick Santelli of CNBC arguing that mortgage contracts are sacred under any and all circumstances, even if this means that families are thrown into the street. "Not everybody needs to be a homeowner" is the tune that Wall Street has taught itself to sing now that there are no more royalties to be had from its predecessor.

The Obama plan has dedicated a small portion ($75 billion out of $750 billion) of the bank bailout TARP funds to create an incentive for banks to renegotiate the terms of mortgage contracts so that people can afford to pay them in light of the mostly unanticipated collapse of the entire world economy. There are still significant details missing as to how the government intends to compel lenders to renegotiate on terms that are more favorable to borrowers, but the move is a step in the right direction.

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