On Februay 18 President Obama and the U.S. Treasury announced another new plan to slow housing foreclosures (U.S. Treasury Fact Sheet).   The faact sheet states that the "Homeowner Affordability and Stability Plan will offer assistance to as many as 7 to 9 million homeowners making a good-faith effort to stay current on their mortgage payments...it will target support to the working homeowners who have made every possible effort to stay current on their mortgage payments." 

The Treasury's new plan will only help owner-occupied primary residences (no vacation homes or investment properties..."speculators and house flippers" in the words of the fact sheet).  There's a total of  about 108 million residential 1- 4 unit properties and condos that qualify for some type of residential mortgage.  Of all residential properties about 25% now have zero or negative equity, so there are about 27 million properties in trouble.  There are about 75 million owner-occupied homes of which 31% have no mortgage at all.  So the plan deals with no more than 34 million owner-occupied homes that have a mortgage (some of the owner-occupied properties are second homes which are not included in the rescue plan).  If you assume that 25% of all the owner-occupied homes have zero or negative equity, that means there are about 19 million owner-occupied properties in trouble.  If the plan only helps 7 to 9 million owners then by the Treasury's own analysis the plan will leave out 18 to 20 million properties in trouble, about 10-12 million homeowners that are in trouble and from any assistance, 56 million owner residences that aren't in trouble, and all 33 million properties owned by investors, of which we might assume there are 25% or 6-8 million in trouble.  We also note that there are no compulsory provisions for any element of the plan.  It's another wing and a prayer.  So the plan might help 7 to 9 million homeowners, if the lenders decide to help.  The plan doesn not reduce the mortgage principal of any loan, and that's the main failure of the plan, since the problem of upside down mortgages is the main problem in the banking system and in the consumer segment of the economy.

One phase of the Plan is supposed to help borrowers refinance if they have loans owned or insured by either Fannie Mae or Freddie Mac ("Agency" or "GSE" loans) to refinance to lower interest rates.  "...a new program that will provide the opportunity for 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Freddie Mac and Fannie Mae to refinance through the two institutions over time."  Treasury gives no further details at all about this phase of the plan, so it's impossible to determine just who qualifies, and when, or how it might benefit them.  It could be the most important part of the plan for the prime credit segment of homeowners, since the biggest problem for many is being upside down so not qualifying to refinance or move without a loss, even if they qualify for refinances given their debt ratios.  Due to the lack of detail, especially compared to the detail given of the second phase of the plan, we strongly suspect this part of the plan is a Trojan horse designed to elicit public support.  The phrase "over time" also makes one suspicious that the pot of gold at the end of the reinbow might just keep receding toward the horizon.

Another major part of the plan is called the "Homeowner Stability Initiative" and is designed to help 3-4 million borrowers of non-Agency loans (subprime, Alt-A, option ARMs, perhaps second mortgages).  Borrowers qualify if they are either underwater or have a high debt-to-income ratio; delinquency is not required.  $75 billion of TARP funds are dedicated to this cause.  It provides interest rate reductions partly subsidized by taxpayer funds.  The fact sheet comments that "This initiative will go solely to supporting responsible homeowners willing to make payments to stay in their home – it will not aid speculators or house flippers."  [underlining and italic emphasis by Treasury not us]  This plan will reduce the interest rate for qualified individuals so that their payment is 31% of their qualifying income.  The lender voluntarily reduces the payment to 38% of income first, and then the Treasury subsidizes the reduction to 31%, however, in no case will the rate be less than 2%!.  A disqualification that may operate all too often is given:  "If the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible."

In another third phase of the plan intended to somehow lower mortgage interest rates in general, "Treasury is increasing its Preferred Stock Purchase Agreements [with Fannie Mae and freddie Mac] to $200 billion each from their original level of $100 billion each."  OK, so that's $400 billion total taxpayer purchases of Fannie and Freddie preferred stock.  Let's see, $400 billion plus $75 billion is $475 billion, enough to pay off 3.89% of all mortgage balances.

Another element of the plan is to give bankruptcy judges the power to modify the principal of a mortgage.  This issue has been debated in Congress for many years and is opposed generally by the financial industry.  It might not apply to very many mortgages...at least not yet, but maybe in another year or two at the rate things are going.

And, finally, in an apparent admission of a fear of failure of the plan itself, the plan includes improving the provisions of the miserably failed "Hope for Homeowners" program that was enacted last October in the emergency bill that included TARP.  "In order to ensure that more homeowners participate, the FHA will reduce fees paid by borrowers, increase flexibility for lenders to modify troubled loans, permit borrowers with higher debt loads to qualify, and allow payments to servicers of the existing loans."  You may recall that government data showed that a mere 25 loans were issued under the program as of last December.  It was expected that the plan would help 400,000, but lenders haven't been interested.