Thursday, February 12, 2009

Obama to Subsidize Mortgage Debt - Reason for a Rocket Shot?

Here’s the “reason” behind the blastoff 1 hour prior to the close. Quick, a show of hands of everyone who believes this will stem the tsunami rolling onto shore!

No, it’s long on ideas, but short on specifics as well as understanding how debt and math work. This is another attempt to socialize the losses. While it sounds as if it will help homeowners, its real goal is to help the banks – they’re the ones who will again benefit.

I can think of many ways to help the PEOPLE more effectively than this. And no, doing a ton of little things will not help, it only makes the math worse. Doing nothing is indeed better than making your debt burden so large that it’s mathematically impossible to recover without national default. Newsflash: the math is already that bad (Death by Numbers).
Obama may subsidize mortgage debt

A program would help struggling borrowers before they default. Feds would use government money to make payments more affordable.

By Tami Luhby, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- The Obama administration is looking at subsidizing the mortgage payments of struggling borrowers before they default, according to sources familiar with the discussions.

If it comes to pass, the program would blaze a new trail in the federal government's foreclosure prevention initiatives. Until now, the efforts have focused on helping those already behind in their payments through interest-rate reductions and other loan modifications. The Bush administration had not committed any money to helping borrowers.

Obama, however, has pledged to spend at least $50 billion to help borrowers in trouble. Treasury Secretary Tim Geithner said Tuesday that the administration would release its plan within a few weeks. He and Housing Secretary Shaun Donovan have been meeting with banks, housing advocates and trade organizations this week to listen to their foreclosure prevention proposals.

Details remain scarce, but at this point the subsidy plan entails having struggling homeowners take an affordability test and undergo a re-appraisal to see if they are eligible. The subsidy would allow servicers to adjust the loan terms without having the mortgage's investors take a loss, which should make them more open to the loan modification.

Assisting borrowers before they default would help stop the wave of foreclosures, which are estimated to top two million this year. That, in turn, will help stabilize home prices.
"This will help put a floor on home values," said one person familiar with the negotiations.

Obama's plan is also likely to include ramping up the streamlining of modifications for borrowers already in default. Already, several banks and Fannie Mae and Freddie Mac are working with homeowners to make their monthly payments more affordable by reducing interest rates, lengthening loan terms and deferring principal to the end of the loan.

Stocks on Wall Street reversed early losses after reports of the plan began to surface.
Meanwhile, lawmakers and regulators are asking financial institutions to halt foreclosures until Geithner unveils his plan. Rep. Barney Frank, D-Mass., said that 95% of banks should put a temporary moratorium in place.

Foreclosure filings - default notices, auction sale notices and bank repossessions - continued to climb in January, though at a slower pace than the month before, according to RealtyTrac. That was still 18% higher than in January 2008.

Lenders repossessed 66,777 homes in January. A total of 1,081,395 homes have been lost to foreclosure since the housing crisis hit back in August 2007.



Barney Frank (and for that matter 99% of government) understands nothing about the current economic situation and how to solve it.

There is no free lunch, economics is underpinned with math. While you can use taxpayer money to fund a buy down of someone else’s mortgage, you still have the obligation, it has just become a socialized obligation. Too many socialized obligations will eventually lead to national default.

Inflating debt away does not work either - you simply deflate away your future purchasing power, thus paying back the debt in other ways. All debts get repaid with interest in one way or the other, or they are defaulted upon. The bankers who issued and leveraged up the debt should be forced to default themselves for the good of our country before our country is forced to default entirely.

Bankruptcy laws need to be changed back so that individuals can default on debts too, just like companies who are able to do so through chapter 7 proceedings.

Home prices need to come down, and the misplaced debt needs to be defaulted by those who hold it. There has been no proposal that I’m aware of that begins to chisel down the debt via a default process. That has to happen to keep the present system going and to have any chance at future growth.