Will Obama's Mortgage Plan Work?

If you’re a homeowner who is struggling to keep up with a mortgage you can’t afford, or wondering whether to continue to stay and pay on a home that is deeply underwater, you may have seen another glimmer of hope in yesterday’s news about more proposals to address the housing crisis.

Early Wednesday, preliminary details of a proposed mortgage settlement between five big banks, state attorneys general and the Obama administration, all of whom have been negotiating for months now, were released.

Under the proposed settlement, five of the largest banks would allocate $25 billion (not all in cash) to be used to refinance or modify mortgages, as well as provide principal reduction for some homeowners. Some of the settlement funds would go to state foreclosure relief programs, and a portion would be used to provide restitution for homeowners who were the victims of abusive foreclosure tactics. Those homeowners would get checks averaging roughly $2000; no doubt amounting to insult after the injury they’ve gone through while losing their homes.

The Center for Responsible Lending, an advocacy group that has been raising concerns about mortgage abuses since the beginning of the housing crisis, said the proposal wasn’t perfect but did “represent an important step forward in addressing foreclosure abuses” by putting an end to robo-signing and servicer abuses, and by promoting “more sustainable mortgage modifications.” Other activist groups are urging a postponement until further investigation.

No deal has been finalized.

The President’s Plan

Later that evening, President Obama raised the housing crisis in his State of the Union address. He made two proposals to help the market:

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The opportunity for “every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates. No more red tape. No more runaround from the banks. “
Calling on the “Attorney General to create a special unit of federal prosecutors and leading state attorney[s] general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.” It will include expanded “investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.”

No specific details of the refinance proposal were released last night, but many are skeptical that the program will go far enough, or that Congress will approve additional measures to help homeowners. TheStreet.com says that analysts are already calling the plan “dead on arrival.” Even if the President is able to expand refinancing opportunities, the sobering fact is that some 11 million homeowners owe more than their homes are worth, and their average negative equity is $65,000, according to CoreLogic. By comparison, $25 billion is a drop in the bucket.

However, neither the initial details of the settlement, nor the President’s announcement, gave struggling homeowners any specific action they can take to try to get help now; any reason to believe that they will be eligible for help so they can keep their homes; or that the housing market will recover anytime soon. Instead, they’re left to keep hanging in there, hoping things might be different this time around.

Why Can’t the Housing Crisis Be More Like the Banking Crisis?

If the government approached the housing crisis the way it did the banking crisis, things might be different, says former TARP General Inspector Neil Barofsky. In a video interview with the American Banker, he says, “They went all in. No cap on resources, tapping every available resource…trillions and trillions of dollars.” But “when it came to the housing market,” he says, “it just wasn’t there.” Comparing the help the banks received under TARP to what homeowners haven’t received, he pulls no punches: “they have a lot more sympathy toward the larger financial institutions, frankly, than to the homeowner on Main Street.”

Once again, the word to struggling homeowners is to sit tight. Hopefully, help is coming. But no word on what happens if it doesn’t.

Image: trint, via Flickr.com