Obama’s real estate stimulus plan leads to confusion amid claims it will only help the irresponsible
It was a shrewd choice of location. Barack Obama went to Phoenix, Arizona, to announce his $75 billion multi-pronged property rescue plan, a state that has been hard hit by falling real estate prices and soaring numbers of foreclosures.Indeed the very latest published figures show that Phoenix saw a 34% fall in property prices from December 2007 to December 2008 and the value of homes have now fallen an average of 45.5% since their peak in June 2006.
So the new president went to the heart of the problem to announce how he is going to solve the problem. He told the packed gym hall at Dobson High School that he was going to help up to nine million borrowers by making it easier for them to re-finance their loans.
In that school hall were the very people who need help. In there were the borrowers suffering from falling property prices and unaffordable monthly payments. Some has queued hours to get tickets for the speech; others had flown in from other parts of the country.
Such desperation to see their leader in person can, perhaps, be seen as part of a wider desperation to stay in their homes. But that is what it is all about, according to Obama, helping ordinary Americans keep the roof over their heads.
Many of the 2,000 people packed into the hall generally agreed. Erica Rodgers camped out for 12 hours to get a ticket and then queued for fours hours to get in to see Obama explain his economic stimulus plan and how it would help people like her.
When the mortgage crisis hit she found her property-management business losing so many clients so quickly that she almost lost her own home to foreclosure. She feels that she is one of the people who need help.
'It was worth it. I was just so moved to see him speak. He's helping. He's doing something,' gushed the mother of two whose husband has temporary jobs to keep the family afloat.
But will it help her? 'I think it's going to create more jobs. It's going to lift this mortgage crisis up,' she replied. But in reality she doesn't know if it is going to help her or many of the others in the hall that day.
Student Jade Meeks, 18, was excited by the announcement. She has just moved out of home. 'It's going to give the younger generation like me a chance to have a home,' she said enthusiastically as she came out from the speech.
Gloria Cooper flew from San Diego to attend the announcement. Both her grown up grandchildren are facing foreclosure in California, another hard hit state. 'This is the change we are looking for,' she declared.
Pensioner Ed Ciesla described the plan as a breath of fresh air. Many properties in his neighbourhood, including the house next to his, have been repossessed. Others have suffered a severe drop in value. 'I think Obama's going to turn all of this around. We need the change,' he said.
But not everyone is so enthusiastic. When questioned for more details officials say that these will all be revealed next week. But that doesn't help people like Erica who don't know if the plan is for them or not. Critics say the plan is fatally flawed because it is aimed at those who are in difficulty and those who are struggling but managing will not benefit at all.
'I'm disgusted by the reaction of the country. A lot of what's happening in Phoenix is people being irresponsible,' said Jack Clark. Fellow Phoenix citizen David Crause agreed. 'We can't borrow and spend our way out of a crisis that that got us into,' he said.
But it is not just ordinary citizens who think this way. On the face of it the plan sounds good. The first part of the proposal will help four or five million homeowners who owe more on the mortgage than their home is worth. A change in federal rules will allow homeowners to refinance at today's lower rates.
The second major part of the plan is intended to help homeowners on the brink of foreclosure, by providing $75 billion in incentives for lenders and homeowners to modify mortgages. The bill, Obama said, will also make sure new loans are available.
State owned mortgage providers Fannie Mae and Freddie Mac will get up to $200 billion in capital in order to keep rates low for families looking for a new mortgage.
But critics complain that the plan rewards people who should have already refinanced their homes. The Republicans ask what the plan offers homeowners who are paying their mortgages and continue to watch their property values drop.
What they want to know is the detail but that won't come until the plan takes effect on March 4th when the administration will also publish the details explaining how everything will work.
'Government stepping in to modify terms represents an encouragement into an area we don't like to go,' said Larry Harris, professor of business and finance at the University of Southern California. Modifying loans can be tricky legally, he said, adding that questions arise over whose on the hook for the loans.
California has also been badly hit by foreclosures. Lenders are concerned too. 'Who's going to take the write-down?' said Babette Heimbuch, CEO of First Federal Bank of California.
Obama's answer to that is that if lenders and home buyers work together, and the lender agrees to offer rates that the borrowers can afford, then the government will make up part of the gap between what the old payments were and what the new payments will be.
But many are uncomfortable with the idea of the government stepping in to pick up the difference. 'While we don't like to see people lose their houses, we certainly don't like the situation where somebody refinanced and spent the money, perhaps irresponsibly, and now the government is bailing them out,' Professor Harris said.
Heimbuch agrees that there is an issue here. 'It's a fairness issue. If you took $200,000 out of the house and now you want to write it down, essentially to forgive it, that's like asking to forgive a credit card debt, and no one's offering to write credit cards off,' she said.
Administration officials have stressed that home owners do not need to be in default to take part in the plan. Borrowers struggling to stay current on their mortgage payments may be eligible for help if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default, officials said.
But that means lending institutions will play a key role in writing down mortgages and they don't yet know what the guidelines are going to be.
Assembly member Ted Lieu has doubts that there will sufficient incentives for lenders to modify loans. Lieu has introduced a bill, which the Assembly approved last weekend that would force lenders to choose between modifying a loan or face a 90 day stop on foreclosures.
Then there are those who believe that the government should not be getting involved at all and it should just allow the real estate market to crash even further. Paul Miller, a banking analyst at FBR Research, believes that the property market is too big, has too far to fall and Americans' finances are too strained.
'You probably have about two to three million homes that we overbuilt, a lot of those have to be converted to rental units. We overbuilt on the high end of the market. We just don't have enough people in this world who can afford these high-end homes. Government should just get out of the way,' he said.
And there are concerns that those who have their property loans remodified will just slip into default again. Research shows that modifying loans successfully is very difficult. Data from the Office of the Comptroller of the Currency shows that more than 53% of loans modified in the first quarter of 2008 had re-defaulted again within six months. Nearly 36% went bad within just three months.
The Mortgage Bankers Association did a study in 2008 that found 70% of foreclosures were on properties either not occupied by owners, were on borrowers who could not be found or did not respond, or on borrowers who had already had a modification and were defaulting again.
The average American has perhaps 30% of equity in his house, but that hides a huge section that has very high loans-to-value. About 28% of mortgage borrowers now owe more than the value of the house, according to Zelman & Associates.
There is an argument that many Americans, particularly less well off ones, would be better off out of home ownership entirely. 'They are going to try and keep you in a home that arguably you don't want to be in. You might be able to go up the street and rent for half the price,' said Ivy Zelman, a housing analyst with the company.
The plan could also face legal challenges. The proposal may violate requirements that homeowners put up at least 20% of the appraised value of a home or carry mortgage insurance, according to Republican Representative Scott Garrett of New Jersey.
'I don't see how that stands in face of what the statute says. It certainly seems as though they need to seek a congressional change, a legislative statutory change,' he explained.
However Fannie and Freddie's chief regulator, James Lockhart said the changes are exempted from mortgage-insurance rules written into the companies' charters and won't require new appraisals. Lockhart said he believes that the plan will make it easier to help struggling property owners get affordable mortgages.
But the American Society of Appraisers, a trade group representing more than 5,000 appraisers, is also considering legal action. It is concerned that the plan could cost its members potential business. It will decide whether or not to sue when the details are published next week.
The key will be in the wording. The difference is that a modification retains the original contract, changing its terms. A refinanced loan requires an entirely new mortgage, which Fannie and Freddie would have to repurchase and repackage into a new security, according to analysts and the companies.
When questioned all officials will say is that the Obama plan will temporarily allow Fannie and Freddie to refinance loans that they own or guarantee with loan-to-value ratios of as much as 105% without appraising the property or requiring additional mortgage insurance.
Top Republicans are also lining up to lay into the plan. House Republican Whip Eric Cantor and Minority Leader John Boehner have sent a letter to the president seeking clarification on six important points.
They want to know what the plan will do for over 90% of US homeowners who meet their payments every month; does the plan compensate banks for bad mortgages they should never have made in the first place; will individuals who misrepresented their income or assets on their original mortgage application be eligible to get the taxpayer funded assistance; will mortgage servicers be required to verify income and other eligibility standards before modifying mortgages; what will be done to prevent the same mortgages that receive assistance and are modified from going into default three, six or eight months later; and how does the president intend to move forward in the drafting of the legislation and who will author it.
Conservative Democrats may also not be happy with some aspects of the plan. But what is clear is that the devil will be in the detail. And people like Erika Rodgers will still have to keep scrimping and saving.