The long-awaited details of President Obama’s $75 billion housing rescue plan were made public today and, incredibly, Obama is proposing more of the same of what got the housing market into trouble to begin with as medicine to heal the market’s ills.
Under the plan, the government will subsidize mortgage holders to reduce borrowers’ monthly payments to a maximum of 31% of gross monthly income. Lenders may do this by reducing interest rates. Those reduced rates will adjust up by a percent a year for five years until they reach the lower of the original rate or the prevailing rate at the time the loan was modified.
You read that right. To help stabilize the housing market – which was knocked off it’s footing by borrowers being unable to pay their adjustable rate mortgages – President Obama is proposing to replace those loans with…adjustable rate mortgages.
The Administration does not provide any details, however, on what happens once these new, new, doubleplusgood ARMs default. It’s a reasonable assumption that they will. Homeowners must show that they are close to default now to qualify for a mondification, and many of them are close to foreclosure due to the reset on the interest rate of their exising loan. The not so hidden secret is that the president is directly risking taxpayer money on borrowers who have already proven their inability to repay their mortgages.
The Administration blames much of the housing martket’s troubles on irresponsible decision making by mortgage banks and predatory lending practices on the part of mortgage brokers. But what does one call extending loans at artificially low interest rates to people who cannot afford to pay higher rates with the intention of raising those rates in later years? It looks to me like exactly how the market got into this mess in the first place. Only this time, taxpayers, not greedy financial executives will be on the hook.