Foreclosure Wars – Part 1: A New Hope

What better way to celebrate a warm-ish MidAtlantic morning than with emerging details about the Obama foreclosure prevention plan?

In a nutshell, we know that the plan will cost $75 billion initially, with $200 billion more to come in subsidies for Fannie Mae / Freddie Mac. It’s a four-pronged approach:

* 5 million homeowners who are still current on their loans, but unable to refinance because they don’t meet the necessary floor of their equity share, will be able to refinance through Fannie Mae or Freddie Mac.

* 4 million homeowners who are in peril of entering foreclosure will have their mortgage payments reduced to 31 percent of their household income, using a $75 billion fund. Essentially, the government is paying part of these people’s mortgages so that they don’t fall behind.

* The government will pay $200 billion into Fannie Mae and Freddie Mac to increase the available housing credit in general.

* Obama will try to convince Congress to give bankruptcy judges the power to renegotiate loans and reduce monthly mortgage payments.

If you believe the New York Times or the Washington Post, everyone in Washington, including John Boehner, J.P. Morgan Execs, and a few academic eggheads, is at this point so cowed by the gravity of the financial crisis that they can’t find it in themselves to criticize the plan, which in any other situation would be decried by conservatives as a step down the slippery slope to Socialism. Only the grassrootsy folks, like John Taylor of the National Community Reinvestment Coalition, are griping about the plan not being aggressive enough because it solicits voluntary participation from the banks, rather then forcing them to reneg loan terms.

Last summer, when the talk of the town was a foreclosure moratorium — which Hillary was pushing and Obama was not — I was vehemently opposed to such a measure. Creating a consequence-free environment for consumers, I argued, would only compound the detriments of the consequence-free environment in which financiers were operating, which brought down the nation’s biggest banks.

What Obama is doing here with allowing judges to renegotiate the terms of consumers’ home loans — if he’s able to do it — will most certainly dry up investment in mortgages like a slug in the sun. It’s difficult to imagine a better or more expedient way of destabilizing the housing industry as a place for safe or profitable investment.

Cleverly, Obama has hedged against this with the outsized cash injection into Fannie Mae and Freddie Mac, the mortgage investment giants. But what happens when those companies, which collapsed under the weight of mismanagement and a fudged vision of the role of profit in the once-government-backed corporations, falter or fail again?

The really scary thing for Obama, I should think, is that this plan — which is a serious and important counterweight to the skeletal stimulus bill, which I don’t think will have anywhere near the discernable effect it’s intended to have — is something that he owns entirely. The Times article notes that aside from the provisions for mortgage judges, nothing needs to be approved by Congress. It was Obama who chose the scale on which to attack foreclosure.

Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.

- TF100D