Details are available, as promised. The WSJ has a through fact sheet here, and overview/article here. Forbes is skeptical about the unanswered questions, here.
Basically, there are two parts to the plan: (1) refinancing; (2) modifying.
Refinancing, to help 4-5 million homeowners: These details have not changed since my last post. The program ends in June 2010.
Modifying, to help 3-4 million homeowners, at a cost of $75 billion:
- The plan covers first-lien loans, on principle residences, with unpaid principle up to $729,750. (Forbes adds that second-lien holders will also be offered incentives to quit their positions, to make the modification of the first-lien more plausible.)
- Lenders must reduce qualified mortgages to payments no greater than 38% of the borrowers income.
- The government will subsidize the difference for reductions in monthly payment down to 31% of the borrowers income.
- Interest rates can be set as low as 2%, and terms as long as 40 years, to reach the 31%-of-income objective.
- Servicers get $1k for each eligible modification, and another $1k per year for three years so long as the workout is successful.
- Mortgage holders get $1500 for modifying while the mortgage is still just at risk of default.
- Borrowers who get their mortgage modified, and stay current on the new payments, can earn $1k per year for five years.
- The loan must have been originated prior to January 2009, and modification is availble through December 2012.
- FreddieMac will audit for compliance.
- See the fact sheet for more details.
After five, years, the interest rates on the modified loans can be increased by 1% per year, up to a ceiling set at the time of modification. Much like the problem of Ricardian equivalence with deficit spending, I am curious as to whether homeowners will spend the money that the modification saves them, or whether they will store it away to cover future increases. Of course, if the homeowner is not "saving" any money because they didn't have it to spend in the first place, this is less of a problem. But, if the plan is not putting money into people's pockets, then it is just a confidence-boosting, property-value-propping measure.
Is this the best way to spend $75 billion? Would it be better spent on municipalities? Tax cuts? Shares of Citibank? The Obama Administration has taken an avowedly three-pronged approach to the bailout: credit liquidity + consumer stimulus + foreclosure avoidance = recovery. They are spending trillions on liquidity, hundreds of billions on stimulus, and only a modest $75 billion on foreclosure avoidance (remember that the program to refinance is costless because the losses to F&F are neutralized by the benefit of fewer foreclosures, in theory). Is this the right balance? Ms. Bradshaw has suggested that the cost of righting the economy has gotten larger the more that Washington has spent trying to do the job; this makes me wonder if Japan took measures to prop up homeownership during their lost decade. The presentation last week suggested that decisive nationalization was largely responsible for their turn around, and as a loyal reader of the Economist, I continue to question whether or not that is the best way for the US to spend its bailout dollars.
Thoughts?
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