Some Thoughts on the Housing Plan

Clive Crook:

The administration's housing plan seems well thought out. All three parts address clear weaknesses in the present arrangements.

The refinancing element, aimed at borrowers in good standing, allows Fannie and Freddie to refinance loans where the value of the mortgage is between 80% and 105% of the value of the property. Up to now they have not been allowed to do this (unless the mortgage is insured). Many borrowers in good standing have seen their loan-to-value ratios climb into this range because of falling house prices. The rule preventing refinancing at current lower rates is self-defeating from the agencies' own point of view, since it increases the chances of default. The plan puts this right--helping both the GSEs and their borrowers. (Some complain that the change only helps borrowers with loans owned or guaranteed by the GSEs. Well, yes, those were the loans affected by the restriction in the first place.)

The loan modification part is aimed at borrowers who are at imminent risk of default, and is modeled on the scheme that the FDIC has been testing and advocating for some months. An explicit public subsidy is involved--to the tune of $75 billion--which in effect will be split between lenders/servicers and qualifying distressed borrowers. Lenders and servicers get cleverly structured incentives to reduce monthly repayments to 31 percent of gross income. (Note that modifications up to now have been few and far between, and have often left repayments unchanged or higher than before, once penalties and arrears have been added back.) Lower repayments obviously lessen the risk of default.