Make a new plan, Stan

The President announced a new plan to help homeowners. In addition to last week's stimulus plan's $8,000 tax credit restricted in various ways to new home purchases, this new plan is intended to help people who own houses and have gotten into trouble through no fault of their own. It is mainly being sold as giving them access to lower rates they are not able to access.

It is not clear how you restrict the universe to that group of people since many did buy homes they could not afford but let's set that aside.

The President's examples of who this will help centers on people with 30-Yr fixed mortgages who now see lower market rates but can't refi because their house prices have fallen and they no longer have a 20% or better equity stake in the house- a typical refi requirement.

But the larger group of people in trouble involves those who took on variable rate mortgages and found the formula rate rise beyond their means as banks pulled the rug out by not letting them refi again into another teaser rate.

At $75bln this plan is estimated to be able to help some 9 mln homeowners; that amounts to $8333 per home or about the same as the new house subsidy (tax credit) in the stimulus package. In addition the administration wants to use Fannie Mae and Freddie Mac portfolios to bring further help. That may be the more useful assistance.

The plan is still sans-details but there is plenty of intent that has been made clear and we can use that as a partial guideline to where we are headed.

In short there is a lot of help that can be extended to the new and existing housing markets. But the constraints on income will bite. Also the provision to try and help only those who are innocent victims could muddy the waters since many used variable rate products to buy more house than they could afford. Are these people going to be helped or thrown under the bus? And interestingly, there is no clear answer on what to do since many taxpayers do not want to help people like that yet other tax payers are those very people and they still view themselves as victims. This is why housing remains a mess that is hard to clear up.

There is also the issue of 'cram downs' that banks don't like. In a bankruptcy proceeding, a judge can just 'cram down' the value of the mortgage (and/or its rate) based on what person could afford to pay. Banks are worried about what happens to second mortgages or even to first mortgages. How will people cooperate and bargain under the new Obama plan if they could get even more relief under a cram down? This question has not been adequately addressed.

As 'we' begin to tinker with the different rules we create a welter of opportunities. People will react to what works best for them. And now so many people owe so much money that is so poorly collateralized that it is the banks that are in trouble. People can walk away from their no recourse loans and banks then have a complete loss and an asset with a negative cash flow to maintain.

Lending needs to have standards. Asset prices are what they are partly because of these standards. The barrier to entry in housing is one of the things that protects house prices.