Wow, where to start? There's so much wrong with this post:

"... or help someone who overpaid for a house they can afford."

This is a canard.

Look ... the federal government, which owns Freddie, Fannie and almost all of the large banks, are foreclosing on millions of homes. The result of this action is to lower home values of every other home, putting millions of people "underwater."

They didn't "overpay" for their homes. Rather, their homes are systematically being devalued by our own government's actions.

Homeowners deserve compensation for the loss of the wealth through this process. There's nothing immoral or unethical about the government making people whole as a result of the government's own actions.

* "You can't help all homeowners."

On the contrary, our government could help all homeowners by Freddie and Fannie offering 2% mortgages to any citizen. Since our government can borrow money from the Fed at .25% to 0% ... it would make 1.75% to 2.0% on these mortgages; while at the same time, significantly lowering the monthly payments of every single homeowner in America.

The only reason the NY Times hasn't figured this out is that reporters who are still left at the bereft NY Times are morons who have no education in Economics.

* "You can't make the pro-bank people happy."

Who are the "pro bank" people. Look ... there are no "pro bank" people any more. All the largest banks in the United States are now owned by the citizens of the United States.

We are the "pro bank" people ... us, the citizenry ... the taxpayers. We own the banks.

If we deny ourselves loan modifications from the banks we now ourselves own, it is a failure, only, of imagination and critical thinking.

Barack Obama, through his Treasury Secretary, noted tax cheat Timmy Geithner, are the bankers because they're the majority stockholders of these banks. If they refuse to renegotiate our loans, then we should fire their asses.

I like the idea in principle but the upfront cost seems politically prohibitive ... 10m at-risk homeowners x $200k appraised value = $2 trillion, right? That's almost 30 times what Obama's plan allocates for troubled homeowner relief. This could be overcome by -- wait for it -- securitizing the rent stream -- but that's not feasible, at least without some guarantees on the rents.

There is also the valuation problem. Market illiquidity makes appraisal even more subjective than usual. But of course in this respect your plan is no worse than a plan to have private asset managers use their mad skillz to value illiquid securities

Finally, I would note that many (though not all) subprime securitization agreements actually contain absolute bars on waivers of due-on-sale clauses and prepayment penalties. Unless you abrogate those clauses (and possible compensate investors) someone will be paying a lot of contractual penalties.

On the plus side, I think your plan actually would be effective at preventing 10 million people from losing their homes and could arrest the destruction of affected communities, unlike anything we've seen to date.

Christine,

Your approach is a classic supply approach. You want to remove homes from the sales market (thus, limiting supply to boost home values).

There's a much, much cheaper way to do that ... in fact to the taxpayer it's cost-free.

You see, our government approves the building of every home in the United States. Local officials issue a building permit, before construction can begin. Without that permit, construction cannot begin.

If you want to attack the supply problem, that is the choke point.

It costs taxpayers next to nothing to slow the construction of new homes. In fact, if we chose to, we could issue a moratorium on all new home construction until the backlog of 10 months supply that we currently have is reduced to the normal 4 months supply.

http://www.data360.org/dsg.aspx?Data_Set_Group_Id=1395

At first blush, that's one of the better ideas I have heard in some time.

John, why would the 2 trillion be due up front? Couldn't the government take over the loans and simply pay back the mortgages on their normal schedule? I understand that would put a $2T liability on the balance sheet, but it wouldn't require cash up front, would it?

Granted there are interest costs, and some of the properties will lose their rental income stream, but in the long run it seems like the costs would be a lot lower than other proposals. Yes, it would turn the federal government into a massive landlord, but the fed gov has also become a massive bank investor... why not a landlord?

That seems like a different plan because appraised value (Christine) is not necessarily equal to mortgage debt (you), and the contractual rules for assumption are different from those for prepayment.

I don't see any reason why it couldn't work in principle. Politically, it's a massive windfall for subprime lenders, who are now creditors of the federal govt rather than of subprime borrowers, but maybe that's OK. That seems fatal, but what do I know.

Also, your plan is more expensive on a present-value basis than Christine's if the homeowners are underwater relative to appraised value (assumed mortgage > appraised value), although I agree that the upfront cost would be lower.

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Miriam

http://www.craigslistguide.info

The plan that Christine outlines is sound in principle. But the devil is in the details. Or, stated differently, announcing plans is a heck of a lot easier than actually implementing them successfully (as dozens of CEOs on M&A splurges over the years have reluctantly confessed to their shareholders).

Here's my point. For any program like the one Christine suggests to succeed, the government will have to accurately identify the homeowners who are presently at the margin -- at imminent threat of foreclosure on terms that would undermine market efficiency. Unfortunately, our government is notoriously unschooled (or perhaps institutionally incapable) when it comes to implementing regulation that effectively operates at the margin. Face facts, folks -- do we really want to live under a government that decides, at the margin, who are the "haves" (successful rent seekers) and who are the "have nots" (all who remain)?

Fedgovernor.......blah blah blah blah blah!

Look .... "overpaid for a house they can afford", meaning they bought way beyond their means. I can still remember when people camped out in front of model homes and joined lotteries just to have a house, or two, or three, or more. There was this hype. Everyone excited about buying homes, banks fighting to offer mortgages to buyers, builders raising their prices every month or every home release 10 to 20 thousand dollars more!
Everybody wanted in! Even those that couldn't afford. And I don't know....I thought bankers were smarter, but they also got caught up in this hype.
Its GREED!
So when finally these 1, 2, or 3 yr fixed rates and interest only ended, here comes a much higher rate, people then got stuck, and couldn't afford to pay mortgage anymore. One house foreclosed, then another, and then another, pulling the home prices down. And people who wants to refi, of course couldn't qualify anymore.
STOP BLAMING THE GOVERNMENT. I don't like this plan that President OBAMA have, to solve this problem. But it is not the governments fault. People need to stop blaming the government for everything and take accountability for their actions. Hey, you're not happy with how they're running the country, then do something about it! It is because that people live in this country that they take this country for granted. Other governments have officials that take their citizen's money and put them in their own pockets! They don't even give their people a voice. And if you keep making your disagreement with the gov. known..you might not live to see the next day.
I like Christine's idea. Also John's and Dave's. Now these are thoughts that make sense.

Nantic,

It is the government's fault. Who do you think bought all those mortgages that people were being given with no documentation and with nothing down?

Your government bought them. Fannie Mae and Freddie Mac bought them. These loans would not have existed if your government hadn't created the market for them.

Now ... the government is lowering the value of YOUR home, even though you are making your payments, by foreclosing on your neighbors.

Why should YOU pay for THEIR mistakes?

My point is that you should nto have to pay for the government's actions.

The government (Fannie and Freddie) created the housing mess that has resulted in your 401k losing half its value in 1 year and the value of your best real asset (your home) losing 30% of its value in one year.

You should be compensated for that loss.

Like I said people need to take responsibility for their actions. If the gov tells you to jump off the bridge, the water is nice and cool, would you?
Gov is not the cause of lowering the value of my home. According to zillow its about 5 grand lower(now its 300,000), but I wouldn't really know....coz I'm not selling it. I do know I'll be paying less tax on it this year. But you know what I do know what is causing the devaluation in my neighborhood. Two foreclosures. Yes, just two. One---the house's foundation started to fall apart after putting in a pool. The soil is clay. Folks just abandoned it before it crumbles down their head. That was easy for them because they're getting a divorce anyway. Two---This family's mortgage interest rates went up, at the same time they just added in a pool from their equity loan, and at the same time their property tax went up. Guess they didn't see that one coming.
My 401k is down 2%. Managed to transfer it to bonds just before the plunge. Bonds are actually making money but got a few stocks that are losing, thus resulting in only 2% loss.
Just paid 16,000 in income taxes for 2008. And it's all going to all those irresponsible people. Sure not all of them are, but this stimulus is created for that lot. 787 billion! And I've gotten a higher amount of stimulus money from Bush than what I'm getting from Obama. I think responsible people should be rewarded too. We too, have use for it and are able to spend it to help stimulate the economy.