We'll be looking at the reactions from various experts
over the next several weeks. One of the first problems, experts say, is that bank cooperation is optional:
WASHINGTON — President Barack Obama's new effort to use Wall Street rescue money to halt the soaring rate of mortgage foreclosures nationwide encourages refinancing of homes that are now worth less than their mortgages and provides incentives for lenders to lower the debt load on struggling homeowners.
Like the failed efforts under the Bush administration, however, Obama's $275 billion plan — announced on Wednesday — doesn't compel banks and other lenders to modify troubled mortgages. Instead, it provides a menu of incentives that may or may not prove sufficient in reaching the goal of helping 9 million homeowners.
"It's a bold plan and that's encouraging. But at this moment, we don't have enough detail, and unfortunately with the foreclosure mitigation plans, the devil is in the details," said Elizabeth Warren, a Harvard University law professor who heads the Congressional Oversight Panel charged with monitoring use of taxpayer bailout funds. "There have been big headlines in the past and the details never caught up with the early promises."
[...] The third and trickiest leg of the Obama plan involves using $75 billion in Wall Street rescue funds for a shared effort to help as many as 4 million distressed borrowers who are behind on their payments or facing foreclosure. Obama wants lenders to lower interest rates and extend the length of loans to make monthly mortgage payments no more than 38 percent of borrowers' after-tax income.
Then, the government will step in and split the cost, dollar for dollar, to buy down those monthly payments until they account for no more than 31 percent of borrowers' after-tax income.
Obama committed to publishing standardized guidelines for mortgage modifications and additional detail by March 4 — an aggressive timetable.
"This sounds good but I'd have to see more," said Harlan Platt, a finance professor at Northeastern University in Boston. Platt has proposed an even more ambitious plan that would involve more aggressive write downs for banks in exchange for a greater percentage of gains when home prices rebound.
The third leg of Obama's plan wouldn't be a permanent fix, but a five-year subsidy designed to stem the rising tide of foreclosures.
"It recognizes that we've got to stop foreclosures, not just for families about to lose their home but anybody who owns a home" and is seeing home price declines, said Ellen Harnick, the senior policy counsel for the Center for Responsible Lending, an advocacy group in Durham, N.C.
Consumer advocates applauded Obama's plan. The response from lenders — which would receive $1,000 payments to refinance mortgages, a $10 billion insurance program and other financial incentives — was lukewarm at best. Republicans sided with banks.
"Among the concerns we have is that it seems to offer little help to borrowers whose loan exceeds their property value by more than 5 percent. This will limit the plan's success in some of the hardest hit areas in California, Florida, Nevada and Arizona, as well as some areas on the East Coast," said John Courson, the president of the Mortgage Bankers Association, in a statement.
Obama's answer to that complaint riles lenders. If lenders aren't willing to write down some of those so-called underwater mortgages, he said Wednesday, bankruptcy courts may soon be able to do so. This is called a mortgage cram-down. Obama supported congressional efforts to authorize bankruptcy judges to write off the difference between what a borrower owes and the home's value.