Reaction to the Action

Obama has finally opened up and showed us the guts of his housing plan. USA Today does a fair job of outlining the details. This is a program that appears to have some potential, and addresses three core areas, refinances, loan modifications, and lender incentives.

What I like:

The loan refinancing is only available to those with good payment histories. We are rewarding those who have acted responsibly and paid their mortgage in a timely manner. This is the sort of thing that we should have been doing in the first place.

The loan modification requires proof of hardship. Those who simply overextended themselves will not qualify. The borrower must prove they can sustain payments on the new loan. The cost of the home has a maximum, so we won't see 5 million dollar mansion qualify. The plan is proactive and can be used BEFORE they fall into default.

Incentives to servicers have a set dollar value. I like this because it keeps them prioritizing high cost loans over lower value loans. The loan is reduced to 31% of income, IE affordable terms, through reducing the first mortgage and extending the loan term.

What I don't like/see:

No requirement for financial education. This is the magic wand approach. We fix the loan but do nothing to help the borrower keep themselves out of this situation in the first place.

The dollar cap on homes is still pretty high, and does not appeared to be adjusted by where they live. Lots of homes in LA cost more than $720,000...none of them will qualify. In contrast I am guessing 98% of the homes in Cache Valley would meet this requirement. We shouldn't be modifying a mortgage on a $700,000 home in Cache Valley!! It may be a regular home in LA, but here that is a mansion. FHA already has loan limits that are established and adjusted by area, why on earth aren't we using those, (or some percentage of them, like 120% of the limit or something?). Any time the government takes a blanket approach it is both unequal and unfair, and families lose.

Dealing with lenders/servicers is all carrot no stick. Asking them to play nice is fine and dandy, what about legislation that penalizes lenders who give loans that are blatantly unaffordable/inappropriate? Many of the subprime loans that were issued over the last 5 years were to families who would have qualified for prime loans.....but the lenders don't make as much money that way.....

Conclusion:
Anything is better than nothing. While it begins to address the problem we have today, it does nothing to lay the framework for avoiding this in the future. We are seeing more reaction to the problem, rather than action that leads us to a more permanent solution.