Wednesday, February 18, 2009

When Optimism Outpaces Realism

The Obama administration has introduced a plan to ease home foreclosures. The feds will put up $75-billion to fund subsidies for mortgage lenders who reduce interest rates for financially troubled homeowners.

That plan is expected to work in conjunction with a measure moving through Congress that would allow bankruptcy judges to modify the terms of mortgages.

Both measures are well-intentioned but carry practical pitfalls. The real estate markets in most of the United States are in decline, in some cases free fall. House values next year could wind up a lot lower than values this year and that could go on for some time.

If I'm stuck holding a $500,000 mortgage on a $600,000 house that's now worth $400,000, I might want to foreclose and take my loss now rather than wait until the house value plummets to $300,000 or $250,000.

Measures like these are sensible if you can freeze conditions at one point in time. They're sensible once the market has truly bottomed. But they could have unintended repercussions when the market is in free fall.

(McClatchey puts the cost at $75-billion but The Guardian has it at $275-billion)

1 comment:

pogge said...

(McClatchey puts the cost at $75-billion but The Guardian has it at $275-billion)

The NYT has it as $75 billion to fight foreclosures and $200 billion in additional backing for Fannie Mae and Freddie Mac. I'm guessing the Guardian lumped it all together.