The Nitty Gritty of Obama's Mortgage Plan

Speaking in Phoenix, Arizona on Wednesday, President Obama said his $75 billion home mortgage rescue plan would "save ourselves the costs of foreclosure tomorrow," but "not help speculators who took risky bets on a rising market." As David Corn highlighted earlier, Obama tempered his appeals to populism and community feeling with a call for responsibility. "Solving this crisis will require more than resources – it will require all of us to take responsibility," Obama said. Great. But how does the plan actually work? Here's a primer.

The first part of the plan is a fairly simple regulatory fix that allows homeowners with Fannie Mae and Freddie Mac mortgages who owe between 80 and 105 percent of what their homes are worth to refinance those mortgages. Previously, only borrowers who had at least 20 percent home equity could refinance. By refinancing at a lower rate, borrowers could save thousands of dollars annually on their mortgage payments.

The second part of the plan focuses on encouraging banks to work with homeowners to modify existing mortgages, which is different from refinancing. The pre-existing "Hope for Homeowners" plan, passed in the closing months of the Bush administration, tried to do this, too, but it didn't work very well. Banks just didn't seem very eager to modify terms to help people stay in their houses. But the new plan, says the Center for American Progress's Andrew Jakabovics, is "light years ahead of anything we saw coming out of the Bush administration."

One big difference with Obama's plan, Jakabovics says, is that it will functionally be "far more compulsory" than the Hope for Homeowners program. Recipients of TARP money will have to participate, and banks will likely be reluctant to turn down government bailout money just so they can avoid modifying terms on home loans. And banks that don't participate might find their loans modified anyway—in the only part of the plan that requires Congressional approval, Obama asks that bankruptcy judges be given the ability to modify loan terms in court. (Judges already have the power to modify terms on people's second and third homes, but not on primary residences).

Just because the plan will be forced on TARP recipients doesn't mean it's a horrible deal for the banks. After the lender reduces interest rates enough so that the borrower’s monthly payment is less than 38 percent of his or her income, the government will split the cost of further payment reductions with the bank, down to a (supposedly sustainable) low of 31 percent. On top of that, lenders will get a cool $1000 for every loan they modify, and further payments if the borrower stays current on the modified loan. And after five years, when the housing market may have recovered, the lenders will be able to start stepping the interest rate back up to the original rate.

What the Obama administration is hoping is that the new payments and government cost-sharing, combined with the threat of bankruptcy court modification and the mandatory participation provisions, will make banks more likely to modify mortgages than they otherwise would be. There's some reason to believe that will be the case, says Jakabovics. "Banks recognize foreclosure is going to be far more costly," he says. The cost of holding properties right now is very high because declining home values, a slow market, and the credit crunch mean foreclosed homes stay on balance sheets for months on end, declining in value and incurring property tax and maintenance costs that banks don't want to pay. Keeping Americans in their homes could be a good deal for banks, too.

The third part of the Obama plan is mostly aimed at keeping interest rates low. The Obama administration will try to do this by having the Treasury Department buy up the dreaded mortgage-backed-securities from Fannie Mae and Freddie Mac, hoping to somewhat reinflate the market for those financial products. Unfortunately, Treasury is probably overpaying for the toxic assets, which have few, if any, other buyers. Economist Dean Baker emails: "The intention is to pay too much. We will take a hit—it's guaranteed... We get whacked on buying Fannie and Freddie MBS at very low rates today." In addition to trying to prop up the MBS market, the Treasury will inject another $200 billion into the two GSE's.

More Pork

A few days ago I noted that a Dan Eggen piece in the Washington Post about "pork" in the stimulus bill wasn't about pork at all.  The stuff he wrote about was just normal spending, not earmarks.

But I suppose one man's normal spending is another man's pork, and a couple of days later Eggen followed up with a piece that provided an actual number from Republican critics.  Bob Somerby glosses his report for us:

According to Eggen, Republicans had “identified $25 billion” in spending provisions which were “questionable or non-stimulative.” ....But readers! The price tag for the stimulus package as a whole came to $787 billion!

....That’s right! According to Republican allegations, only 3.2 percent of the bill constituted a spending spree involving larded-up pork! Only 3.2 percent — a rather minuscule amount. You’d almost think that this percentage might have appeared in Eggen’s report. But given the way this press corps works, numbers like that will appear in the Post about the time pigs, and related pork products, fly. Modern journalists don’t do policy, as Eric Boehlert noted last week.

So even if this stuff was pork — a debatable notion in the first place — it was only 3% of the total.  And presumably this was the best Republicans could come up with.  The bottom line, then, is that even according to its sharpest critics, the final stimulus bill was 97% muscle.  If that's true, this is probably one of the cleanest spending bills in the history of congress.  Nice work, Democrats!

This Is Why Lobbying and Ethics Reform Is Important

An unbelievable $8 billion in financial fraud was enabled by the fact that Washington politicians, in exchange for feeding at Robert Allen Stanford's campaign money trough, acceded to the money manager's wishes and didn't pass a 2002 bill that would have made preventing and discovering fraud of exactly his kind much, much easier. Hey, here's a thought! Maybe when a guy spends millions of dollars urging you and your colleagues not to pass stricter controls on fraud, you should pause and consider his motivations! He's probably into something he's not supposed to be into!

This is infuriating. The lawmakers who took money from Allen should have to write personal checks to the people he defrauded. They bear responsibility for this.

(Serious kudos to OpenSecrets for uncovering this connection.)

On Wednesday morning in Phoenix, President Barack Obama unveiled his $75 billion (and maybe more) home mortgage crisis plan. The package is a grab-bag of provisions. The main ones aim to refinance mortgages for 4 to 5 million "responsible homeowners," to set up a "stability initiative" to help 3 to 4 million "at-risk homeowners," and to reduce overall mortgage rates by committing more money to Fannie Mae and Freddie Mac. Obama also noted his support for changing bankruptcy rules so judges can lower home mortgages for borrowers in bankruptcy. Overall, the details are, at this point, vague. And there's no telling if any of this will work--and arrest a possible death spiral in the real estate market. Policy wonks and partisans will argue over the various components. But what was apparent was Obama's skill as an effective policy pitchman.

The speech hit several important themes for Obama: community, populism, and responsibility.

The 6th Street Viaduct

The 6th Street Viaduct in Los Angeles has been slowly crumbling for years thanks to defects in the cement originally used to build it, and the city recently unveiled its plans for a replacement:

After a series of public meetings over the last two years, city engineers decided that replacing the bridge was the only viable option....A model of the proposed span shows two rectangular towers in the middle of the bridge, with cables down both sides.

....The cost of replacing the viaduct with the proposed structure is estimated to be about $345 million, officials said.

This is just idle musing, but I wonder why this bridge costs so much?  The original structure cost $2.3 million, which comes to about $36 million in today's dollars.  In real terms, then, the bridge costs ten times as much today as it did in 1932.

Why?  Labor costs are proportionately higher today, of course.  The old bridge has to be built around and then demolished.  LA is built up and we can't just build a cement factory on site, the way we did 75 years ago.  Earthquake standards and general permitting requirements are more stringent.

On the other hand, we also have 75 years of technology progression.  Labor costs may be higher, but we use less total labor and more machinery these days.  And computers help with most of the design work.

Like I said, just idle musing.  But it sure seems odd that after 75 years of fantastic technological progress, it not only costs more to build a bridge than it used to, but it costs ten times more.  That's a lot of dough.  I just hope it's shovel ready.

Supreme Court May Hear Mercury In Tuna Case

Last fall, we published a story about a woman named Deborah Fellner who had sued Chicken of the Sea alleging that she had gotten mercury poisoning from eating the company's canned albacore tuna. Tuna companies have known at least since the 1970s that canned tuna can contain high levels of mercury, which can cause neurological problems that resemble Parkinson's disease and other ailments. (Fellner's hair fell out, among other things.) Yet a New Jersey federal court initially threw out her case thanks to help from the Bush FDA. At the request of the tuna industry in another lawsuit, the FDA had claimed that such lawsuits were "preempted" by federal law because it was already doing such a good job of regulating tuna.  A judge agreed, and using that decision, Chicken of the Sea claimed that Fellner's lawsuit was likewise trumped by federal regulators, largely because they had posting a warning about eating mercury in fish on the FDA website. It was a pretty flimsy argument, and eventually, an appeals court reversed in favor of Fellner. Her lawsuit has been proceeding ever since. And now it looks like it might go all the way to the U.S. Supreme Court.

Comparative Effectiveness

Via Ezra, medblogger KevinMD writes in favor of federal funding for comparative effectiveness research:

Physicians need an authoritative source of unbiased data, untainted by the influence of drug companies and device manufacturers....The only way to tackle such a huge project is with money, and indeed, the Obama administration recognizes this fact by including $1.1 billion in comparative effectiveness research in the economic stimulus package.

Clearly, the pharmaceutical and device industry would like both the public and physicians to continue to assume that "newer means better." Not asking these questions allows them to continue promoting profit-making brand-name treatments.

Their motives in attempting to quash comparative effectiveness research could not be more obvious.

Indeed, their motives are obvious: They know perfectly well that a lot of their newest and priciest treatments aren't any better than the stuff going off patent next year, and they'd just as soon no one knew that fact.  But I'd like to know, and I'm positively delighted to kick in my share of that $1.1 billion to find out.  Anyone who's not a pharmaceutical executive ought to be pretty happy about it too.  Ezra has more on how the whole scam works.

Bobby Jindal Is Scheming

Is Governor Bobby Jindal (R-LA) really going to turn down the roughly $3.8 billion in stimulus funds slated for Louisiana, as he's threatening? Of course not. Louisiana is a poor state with growing unemployment. It is experiencing a budget shortfall. If Jindal turns down the money and the economies in the other 49 states creep upward over the next 12-18 months, Jindal will have committed career suicide.

So what's with his posturing? I would posit that he's simply a crafty and ambitious politician. Jindal is building an reputation as the most conservative member of the GOP's presidential wannabe crowd, which squabbles over who is the most right-wing every time it hits the Iowa campaign circuit. Talking tough about the stimulus nets him press now; quietly taking the money a few weeks from now will almost certainly go unnoticed.

GOP Meltdown Watch

The Republican leader in the California state senate is one of only two GOP senators who's agreed to back a budget compromise that includes both spending cuts and tax increases.  Last night, Sen. Mark Leno (D-San Francisco) taunted the holdouts, telling them, "You ought to follow your leader or choose a new one."  It turns out they agreed:

Around 11 p.m., a group of GOP senators, unhappy with the higher taxes that Senate leader Dave Cogdill of Modesto agreed to as part of a deal with the governor and Democrats, voted to replace him in a private caucus meeting in Cogdill's office.

They chose Sen. Dennis Hollingsworth, a staunchly antitax lawmaker from Murrieta, as their new leader.

....Hollingsworth said he does not want to see a tax increase passed, but he offered no plan for resolving the budget crisis.

So it's back to square one with the flat earthers determined to wreck the state.  A friend of mine emailed to say that my post the other day comparing California Republicans to lemmings and neanderthals was unfair to both lemmings and neanderthals, and I guess he had a point.  So what do we compare them to now?

Homeowner Bailout

President Obama unveiled his homeowner bailout plan today.  The first provision is aimed at motivating mortgage servicers to offer underwater homeowners improved loan terms:

Servicers can receive an up-front payment of $1,000 for each eligible loan modification that meets certain criteria. The government said it would pay servicers $500 and mortgage investors $1,500 if at-risk loans are modified before borrowers fall behind. The government said it would also help pay down the principal of certain mortgages by up to $1,000 a year for up to five years if the borrower doesn't miss any payments.

Hmmm.  Loan servicers already have an incentive to rework loans that would otherwise go into default, and for the most part they aren't doing it.  Will a couple thousand dollars change their internal calculus?  Offhand, it doesn't sound like enough to really make a difference — though another provision of Obama's plan adds a stick to the carrot, by allowing bankruptcy judges to unilaterally alter mortgage terms.  So it's possible that the carrot and the stick together will have a noticeable impact.

The second major part of the program is aimed at lowering interest rates on underwater loans:

Finance companies cannot currently refinance a loan if the homeowner owes more than 80 percent of the home's value. But under the plan, Fannie and Freddie — which were taken over by the government last year — would be able to refinance a mortgage if it does not exceed 105 percent of the current value of the property. For example, if the value of the borrower's property is $200,000, but the homeowner owes $210,000, he or she could still qualify for the program.

This sounds promising.  If the interest rate reductions are significant, it could provide some serious help to homeowners.  It will also help arrest the slide in home prices, which might be a worthwhile goal at this point.  It's true that house prices are still too high and need to fall further, but Obama's program most likely won't have a serious effect for another six months at least, and by that time we might be at risk of house prices overshooting on their way down.  A program that pushes against that tide could end up being a good countercyclical tool.