Obama Blinked!

Although the so called Bankruptcy Cramdown provision; the ability of BK judges to reduce the amount of loans on property in the course of the BK, is extended for the first time to first mortgages on principal residences; the fact that there is no general across the board principal reduction for home owners will keep the bill from solving the housing crisis.

Giving "Incentives" to unscrupulous lenders to cooperate and lower mortgage payments will not work. It hasn't worked in Hope or Hope for homeowner plans as we have seen.

There are simply too many considerations and limitations; who owns the mortgage or part of the mortgage? Who is servicing it? Do you know that some well known mortgage services eagerly purchase defaulting loans and make huge profits by adding fees and foreclosing on them? What are the mortgage owners or their investors contractual obligations toward modification or principal reduction, etc.

Only a Federal Law could cut through those considerations and force action by the lenders.

I believe Obama knows the answer is principal reductions on home mortgages down to 80-90% of CURRENT market value is the most powerful answer to the foreclosure crisis.

This would allow the 20% or so of all mortgage holders who are underwater, whose mortgage is more than the house is worth, to reset to payments they can afford. If these people are not relieved, they have ZERO incentive to sacrifice their life savings or retirement savings to keep paying their mortgage.

Perhaps in a few months Obama can say, we tried everything else and it did not work, so we are now going to force lenders to reduce principal on all loans to affordable levels. He probably felt it would be too radical and face too much opposition from the Know-Nothings, like Eric Cantor; and getting something passed now was better than getting nothing passed.

However, the hour is late, perhaps too late to put the housing monster back in its cage. It is already sucking up the scarce money homeowners need to service not only their mortgage but their credit cards, auto and student loans, which will cause massive defaults in those areas, hurting the banks even more.

There is even more carnage just over the horizon as I point out in an earlier posting.

There is already baked-in to the forecasts by Credit Suisse about 6 Million more foreclosure over the coming two years because of massive, Trillion dollar defaults in Alt-A and Option Arm loans.

Already 60% of Option Arms are underwater and more than 80% of borrowers are paying less than the interest owed on each payment, thereby Increasing the amount of principal owed with every payment!

Also, something I have not seen discussed is that even Prime loan defaults will probably skyrocket in the next 2-3 years. Historically their defaults peak 3-5 years after they are issued.

That means that the Trillions of dollars in prime loans written at the peak of the boom, 2005 and 2006 and therefore have suffered the sharpest home value drops,will enter peak default periods in 2008-2011. Already, Prime loans are entering default stage at a higher rate than sub prime in some areas!

Finally, the Know Nothings are crazy if they feel that an overall mortgage default rate of 10% is acceptable!

This is fully 10 Times the normal mortgage default rate! Many banks have about 50% of their capital in residential mortgages. A 10% default rate on their assets would reduce their lending capacity by 10-20x that amount. Such a blow to their lending and therefore earning ability would cripple them.

The Know Nothings are now, predictably, so consumed with the fear (they love to spread fear, remember the Yellow and Orange Alerts during the 2004 campaign?) that a homeowner who cheats, obviously a minority of all borrowers gets bailed out?

What about the banks and Wall St where All of the big banks and brokerage houses, rating agencies and others who created this mess in the first place? Aren't they being bailed out regardless? Oh, I forgot, the banks are too big to fail, but the homeowner is too small to bail.

In summation, I believe Obama's Home Rescue Plan is too little, too late, especially after the Know Nothings get finished savaging it. Will he get a second chance to make it better? Will it matter?