Recently, President Obama proclaimed his new slogan of “we can’t wait” as he described new action that he claims will help the ailing housing market and save homeowners from foreclosure. The action consists of re-working an already in place government refinance program through FHA, Fannie Mae and Freddie Mac. The primary change pertains to refinancing homeowners that are under water, or that owe more than their homes are worth. In the past, there was a restriction that the borrower couldn’t be more than 25% under water and that restriction has been removed.
So, it’s a plan that rewards good behavior with a lower payment but the plan does nothing to help the borrowers that have already lost their homes, nothing for the borrowers that are delinquent and nothing for borrowers that are already in foreclosure. Possibly more important in terms of the overall housing market, it does nothing for the huge inventory levels of foreclosed properties sitting on the books of Fannie, Freddie and FHA. While it’s great that some homeowners will be able to stay in their homes longer, I’m convinced this is not the help the market is needing. What we’ve done is allow these borrowers to stay longer, only to come to the conclusion at some point a few months down the road that they still owe tens of thousands or even hundreds of thousands of dollars more than their homes are worth and we may see increased defaults on these same loans in the future. Unless the negative equity problem is fixed, this isn’t going to bring the real estate market any headway in the need to stop the erosion in valuations.
At best, this is merely another stimulus plan and possibly nothing more than a political play. If this is the best the administration can do, then we’ll continue to see a housing market that struggles for a very long time. Possibly the best course of action to address the housing market would be an appropriate environment to increase employment and improve consumer sentiment. Unfortunately, with the petty partisian politics likely to play out until next November, the prospects of that kind of help seem far more distant than a year away.