Thursday, March 5, 2009

The Mortgage Plan: A Passed Ball

When the Obama Mortgage Plan was announced, we opined that it was another passed ball, without the benefit of many details. Now, in today's New York Times, a well written piece by John D. Geonokopolos of Yale and Susan Koniak of Boston University, contains a run of the numbers.

The writers note that the plan gives an interest rate reduction for five years, but, as we surmised, the principal reduction for five years is not meaningful, capped at $5,000. The point to note is that the plan does nothing to stem foreclosures on a significant scale and does nothing to change the incentives for homeowners with no equity in their home to walk away from the mortgage and the home.

Servicers are shown as standing in the way of a path that would, according to the authors' calculations yield bondholders significantly more cash than the foreclosure path. The piddling incentives to servicers are inadequate to negate their incentive to move to foreclosure.

The fundamentals of the declining residential real estate market and the cascading effect on asset prices and foreclosures remain unaddressed, and yet this plan carries another hefty price tag.

No comments: