Obama’s Housing Blog

Earlier this month, we reported that President Obama’s “Making Home Affordable” program, a government subsidized mortgage modification plan, was mired in red tape, delays and questionable benefits for homeowners. But that’s not the only area of Obama’s housing recovery plan that’s struggling. Despite putting a total of $275 billion on housing recovery efforts, Obama’s attempts to spur housing markets have sputtered.

Today, both the New York Times and Bloomberg have focused on the kinks in Obama’s plan to stabilize the real estate market.

The New York Times zeroes in on Obama’s plan to offer homeowners new mortgage deals. As of June, the New York Times reported that Obama’s $75 billion homeowner bailout had succeeded in modifying only 100,000 loans nationwide. Under the plan, mortgage servicing companies are offered $1,000 for each loan they modify, plus an additional $1,000 for up to three years. The NYT takes a look inside some of the call centers that are charged with offering mortgage modifications to homeowners. Unfortunately, the results are typical of many call centers. Here’s the NYT’s assessment:
“…in the four months since the Treasury Department announced the program, millions of new homeowners have slipped into delinquency and foreclosure. For now, progress is constrained by the limited capacities of mortgage servicing companies, said Michael S. Barr, the assistant Treasury secretary for financial institutions. He offered the first signs of the administration’s impatience with the institutions that control home loans.

“They need to do a much better job on the basic management and operational side of their firms,” Mr. Barr said. “What we’ve been pushing the servicers to do is improve their infrastructure to make sure their call centers are doing a better job. The level of training is not there yet.”

Obama’s larger housing recovery plan has done little to boost home-buying, Bloomberg points out today. Banks are still skittish about offering loans to real estate investors, and mortgage lending is currently at a 13-year low. Bloomberg quotes Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies as saying that Obama’s $8,000 tax credit for first-time home buyers has failed to significantly help the market.

Undercutting any other signs of hope in the housing market, are some troubling fundamentals. Here’s Bloomberg’s round-up of the data:
“Personal bankruptcies rose 37 percent in May from a year earlier, according to the American Bankruptcy Institute, based in Alexandria, Virginia. Credit card defaults in the first quarter went to 7.79 percent from 4.83 percent a year ago, Federal Deposit Insurance Corp. data show. While the share of loans entering foreclosure moved to 1.37 percent, the highest ever, the first-quarter mortgage delinquency rate climbed to a record 9.12 percent, the Washington-based Mortgage Bankers Association said.

About 20.4 million of the 93 million houses, condos and co- ops in the U.S. were worth less than their loans as of March 31, according to Seattle-based real estate data service Zillow.com.”

The Mortgage Bankers Association has slashed its estimate of the number of mortgages its members will issue in 2009. One reason: Few refinancings are being done under President Obama’s ballyhooed Home Affordable Refinance Program.

The MBA is forecasting mortgage originations of $2.03 trillion for the year, a drop of more than $700 billion from its March forecast. More than $600 billion of the drop is due to fewer refinancings than originally predicted.

Only 13,000 Obama refinancings have been completed during the first three months after the program’s launch, the MBA said Monday. Policy makers originally projected that 4 million to 5 million mortgage borrowers would take advantage of the program over the next year.

The Obama plan targets borrowers with loans guaranteed or owned by mortgage giants Fannie Mae and Freddie Mac, and it enables them to qualify for refinancing into a lower rate if their balances are too high relative to their home values.

But the MBA is skeptical that the number of refinancings under the Obama plan will ever hit projections.

“While the number of loans completed under this program is likely to increase,” said Jay Brinkmann, chief economist for the MBA in a release announcing the lowering of origination estimates, “it is difficult to craft a scenario under which origination volumes would come anywhere close to reaching the numbers originally envisioned for the program, particularly under our higher rate environment.”

One reason why the Obama plan hasn’t taken off yet is that lenders/servicers are still gearing up to handle it, according to John Courson, president of the MBA. It’s not as simple as a regular refi, he said.

Plus, Fannie and Freddie have different procedures and guidelines for the loans, and servicers have had to learn both.

Freddie loans, in particular, were problematic, Courson said. The company decreed that only the actual servicer of a particular loan could issue a refi. He said Fannie allowed any approved servicer to do so.

WASHINGTON – President Barack Obama on Tuesday squared off with the insurance lobby over industry charges that a government health plan he backs would dismantle the employer coverage Americans have relied on for a half-century and overtake the system.

The harsh exchange came after months of polite White House photo-ops at which the administration and insurers emphasized their search for common ground. It happened just when Congress seems to be floundering in its attempt to move sweeping legislation embodying Obama’s top domestic priority, although leading lawmakers say they remain confident.

Government plan
Obama made his comments as officials disclosed that key Senate Democrats had whittled more than $400 billion off the cost of a health care plan that carried a $1.6 trillion price tag last week. The new cost is below $1.2 trillion, but still above the informal target lawmakers have set. The officials spoke on condition of anonymity, saying they were not authorized to disclose details of the closed-door talks.

Sen. Kent Conrad, D-N.D., told reporters the reductions were achieved by lowering subsidies designed to make insurance affordable for those who lack it, as well as other changes.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, told reporters he was very close to his $1 trillion target, and predicted, “we’ll make it.”

Baucus has been struggling to produce a bipartisan compromise on Obama’s priority issue.

Obama’s comments went to the heart of one of the most controversial issues in health care, the demand by many Democrats for a government-sponsored health insurance that could compete with private plans.

Individuals and small businesses would get to pick either the public plan or a private one through a new kind of insurance purchasing pool called an exchange. Eventually, the exchanges could be opened to large companies as well. “The public plan, I think, is an important tool to discipline insurance companies,” Obama said.
“If private insurers say that the marketplace provides the best quality health care … then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business?” Obama said in response to a question at a White House news conference.

“President Barack Obama in his historic address to the Muslim world in Cairo, Egypt last Thursday, June 4, 2009 focused on reaching out to cooperate and form partnerships to address the four most prominent issues facing our shared cultures – terrorism, Israel, Iran and democracy. I would like to highlight and expand upon his third point which is his concern over Iran’s persistent efforts to attain nuclear weapons and become a nuclear power.”

“President Obama said this in his speech: ‘It’s about preventing a nuclear arms race in the Middle East that could lead this region and the world down a hugely dangerous path.’”

“In this instance, missile defense will play a vital role in the solutions that our two cultures will work together to develop in order to resolve this dilemma. There are three possible policies that we must consider with Iran: 1) Acceptance of Iran being a nuclear power; or 2) Military action and 3) Diplomacy to prevent Iran from becoming nuclear.”

“There are consequences with each of these processes and their effects would involve the requirement to field and deploy effective missile defense systems for the national security of the United States homeland and throughout the Middle Eastern region and Europe as well as Russia.”

“Diplomacy, the third option, requires a stable environment and cooperation between many countries and cultures, as the Sunni countries of the Middle East and Israel will be tempted to use military force or become nuclear in response to failed diplomatic efforts.”

“Deployed missile defense systems can produce a stable environment necessary for diplomatic efforts which will require a steady hand against increased rhetoric, belligerent behavior and military testing of missiles and nuclear technology. The case for missile defense has been made, proven and continues to be proven to allow U.S. and international diplomacy to continue with North Korea without military intervention or nuclear proliferation. Japan and South Korea have restrained their actions due to their confidence of U.S. deterrence and belief in the current missile defense assets in place to protect them.”

“This real life case study would have merit with the neighboring countries of Iran and those in the Middle East. The missile defense systems cannot just be based in the local region, but rather stem from the fundamental core belief that the U.S. homeland must be defended to allow the U.S. the credibility to assure defense of its allies and friends. This would entail the deployment of long range, medium range and short range missile defenses in the United States, the critical regions throughout the world and in Europe.”

“It is of amazement or of political gamesmanship that the United States Secretary of Defense is attempting to convince the U.S. Congress that a reduction of 32 percent of long range missiles to defend the United States homeland is necessary, even though the threat has increased, the diplomatic need has increased and the U.S. assurance of our allies has increased. Moreover, the American taxpayer has paid for the majority of the system that the U.S. Department of Defense stated was necessary to defend the U.S. homeland from both Iran and North Korea. It would be hard to believe that the American people who support missile defense at close to 90% would accept a significant reduction in protection of their homeland that is being sold today to the U.S. Congress by the Department of Defense.”

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government’s budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

“There is a growing awareness of the need for fundamental tax reform,” Sen. Kent Conrad (D-N.D.) said in an interview. “I think a VAT and a high-end income tax have got to be on the table.”

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American — a tangible benefit that would be highly valuable to low-income families.

Liberals dispute that notion. “You could pay for it regressively and have people at the bottom come out better off — maybe. Or you could pay for it progressively and they’d come out a lot better off,” said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health financing plan that targets corporations and the rich.

A White House official said a VAT is “unlikely to be in the mix” as a means to pay for health-care reform. “While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers,” said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

Still, Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel and author of the 2008 book “Health Care, Guaranteed.” Meanwhile, former Federal Reserve chairman Paul A. Volcker, chairman of a task force Obama assigned to study the tax system, has expressed at least tentative support for a VAT.

“Everybody who understands our long-term budget problems understands we’re going to need a new source of revenue, and a VAT is an obvious candidate,” said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. “It’s common to the rest of the world, and we don’t have it.”

The Obama administration on Thursday laid out additions to its housing-rescue plan that are designed in part to make it easier for financially troubled homeowners to sell houses that are worth less than their mortgages.

The newest initiative creates a standardized process and adds incentives for so-called short sales, in which a borrower — with lender approval — sells the home for less than the amount owed.

The government also said it would make it simpler for borrowers to voluntarily transfer ownership of properties to mortgage companies through a “deed in lieu” of foreclosure, helping the companies avoid a potentially costly and time-consuming foreclosure process.

Administration officials said the new initiatives could help hundreds of thousands of borrowers or more.

The guidelines come nearly three months after the administration laid out its $75 billion housing-rescue plan, which uses financial incentives to encourage mortgage companies and investors to modify troubled loans. The latest announcement is aimed in part at borrowers who can’t be helped by a loan modification.

Efforts to implement the programs are just getting off the ground. Government officials said Thursday that mortgage-servicing companies have offered more than 55,000 trial modifications to financially troubled borrowers and that thousands of those borrowers have begun making loan payments under the program.

In addition, roughly 3,600 borrowers have lowered their loan payments under a program that allows borrowers who have little or no equity to refinance, provided that their loan is owned or backed by government-controlled mortgage giants Fannie Mae and Freddie Mac. Fannie has received more than 51,000 applications for the program.

But not all borrowers can be helped by such efforts, often because they have too much total debt or not enough income or because modifying the loan may not be economical for an investor or lender compared with foreclosure.

The government will pay mortgage-servicing companies up to $1,000 and borrowers up to $1,500 for successful short sales or “deeds in lieu” transactions. It will also spend up to $1,000 to help defray the cost of getting holders of second mortgages to release their liens so these transactions can be completed.

Short sales have accounted for 15% to 20% of sales of existing homes this year, according to the National Association of Realtors. A short sale can result in lower losses to investors compared with a foreclosure but needs lender approval and can take three to four months to complete, said Bill Etchegaray, a real-estate agent with Century 21 Superstars in Yorba Linda, Calif.

The incentive payments to mortgage-servicing companies and streamlined process could help clear the logjam of distressed home loans, said Thomas Lawer, an independent housing economist, adding that “it’s crystal clear” that short sales are often preferable to a foreclosure. But “giving borrowers money to encourage them to sell their homes without having to repay their debt is a slap in the face to everyone else,” he added.

Another part of the program provides additional payments to lenders, servicers and investors for loan modifications in areas where home prices have been dropping. Payments under this program could in some cases total thousands of dollars per loan, administration officials said, and are designed to offset concerns that investors will face additional losses if the modified loans redefault.

So far, 14 mortgage-servicing companies have signed up to participate in the loan-modification program, and 75% of loans are now covered by the plan. The firms include Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Other mortgage companies, including SunTrust Corp., PNC Corp. and American Home Mortgage Servicing Inc., said they are still evaluating the program. HSBC Mortgage Corp. said it has been implementing the Obama program for borrowers with Fannie or Freddie mortgages, but is still evaluating the program for loans it owns. PNC is applying the guidelines of the Obama plan to loans owned or guaranteed by Fannie and Freddie, but hasn’t yet signed a contract with the government that would require it to apply those same guidelines to loans it owns or services for investors, a company spokesman said.

In the span of just over a week, America has witnessed the debunking of “savior-based” economics. That, you might have heard, is the theory that posits all you need for smart economic policy is to assemble a bunch of indispensable brainiacs in Washington and let them work their magic. (Hollywood has its own version of this theory, which is why we end up with the “great cast, bad movie” phenomenon. See “Ocean’s Twelve” or “Ocean’s Thirteen.” Rather, don’t see them.)

First came Treasury Secretary Timothy Geithner’s tightly-wound presentation of a banking bailout plan that left Wall Street both somewhat confused about its details and somewhat terrified that the fuzzy thing wouldn’t work. Next, came President Obama’s signing of a $787 billion “stimulus” plan where most of the stimulus may actually kick in after the economy starts to recover. (Too little boli, too many Tic-Tacs in that one.) And now comes the third leg of the chair, a $75 billion housing bailout plan (though it could surge to $300 billion or more). It will attempt to help some homeowners refinance, assist others in lowering their monthly payments, and reduce mortgage rates.

The Obama plan is certainly more ambitious and costlier than many expected, especially in its use of Fannie Mae and Freddie Mac to influence the mortgage market. But will it all work? An analysis by IHS Global Insight concludes that it will help prevent some number of “preventable” foreclosures. So that’s something. But between 10 million and 15 million homeowners are underwater and that number is growing. Who knows how many will walk away from their homes and to what extent the Obama plan will help? IHS Global just shrugs. Me, too, especially since the plan, while potentially lowering mortgage interest rates, doesn’t make a clear provision for reduction in the principal. That’s the real killer.

But it is certainly debatable whether we should even be trying a savior-based plan to prevent foreclosures. Do we need Uncle Sam to “save” homeowners who have sinned against the gods of financial prudence? Here’s how the folks at Weiss Research see things after examining the Obama plan: “Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage. … Delaying and dragging out the downturn by artificially propping up home prices will arguably work against the market healing.”

In the same vein, former Bush economic adviser Lawrence Lindsey has suggested an immigration program that would give a provisional green card to anyone who invested at least $10 million in residential property and held it for five years. And bond guru David Goldman of the Inner Workings blog relates that he’s been getting inquiries from Chinese investors interested in the U.S. housing market. He also highlights what is easily the worst aspect of the Obama plan, the “cramdown” provision which would allow judges to modify mortgages. “Allowing judges to show generosity to homeowners … and keep them in their homes makes the core assets of the banking system uncertain. … Cramdown probably is responsible for the deterioration of subprime AAA’s during the last few days.” That’s what happens when you toss 1,000 years of contract law out the window in the middle of a global financial crisis.

But the plan falls short of what some experts were pushing for, in both elegance and scope. For instance, Alan Blinder, the former Fed vice chairman, wanted a $400 billion, 21st-century version of the New Deal-era Home Owners’ Loan Corp, which bought mortgages from banks and then issued more affordable new loans to struggling homeowners. Then there’s Glenn Hubbard and Christopher Mayer of the Columbia Business School who advocated a $338 billion plan to allow all mortgages on primary residences to be refinanced into low, low, low 30-year, fixed-rate mortgages. And independent investment strategist Ed Yardeni and Carl Goldsmith of Delta Asset Management proposed fully nationalizing Fannie Mae and Freddie Mac and then offering a trillion bucks worth of 30-year, fixed-rate mortgages at 4 percent to all qualified borrowers to buy a new or existing home.

Maybe one of these pricey plans could have turned around the housing the market and the economy. Maybe not. But Obama’s surely won’t. And that’s not really the intent, apparently. It’s all about stabilization. As the president himself said, “If we act boldly and swiftly to arrest this downward spiral, then every American will benefit. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. … And by bringing down the foreclosure rate, it will help to shore up housing prices for everybody.”

“Arresting downward spirals.” “Preventing the worst.” “Shoring up prices.” Well, you can’t exactly accuse Obama of overhyping the benefits of this proposal. Nor should he, given the pessimism found in current economic forecasts. The Fed now thinks that the unemployment rate could climb to over 9 percent this year and next, and still be above 8 percent in 2011 — some four years after the recession began. And the Philadelphia Fed surveyed 43 forecasters who predicted that the unemployment rate will rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010.

So there are no miracles in any of this. No quick turnarounds. No light at what appears to be a very long and treacherous tunnel. As Bill Murray’s weatherman character put it in Groundhog Day,”I’ll give you a winter prediction: It’s gonna be cold, it’s gonna be grey, and it’s gonna last you for the rest of your life.” At least, it kind of feels like that. (This is probably a good time to point out that just over a year after President Reagan signed his revolutionary economic plan, the economy shifted into high gear and never looked back. But no Morning in America around here anytime soon.)

This is Obama’s multi-trillion dollar economic recovery plan, Obama’s multi-trillion dollar choices for economic salvation. It has government spending taxpayer money like never before to boost the economy. Conservatives says it’s too much (and wrongheaded), liberals too little (and weak-hearted.) But no more blaming former President Bush. It’s Obama’s housing crisis, his banking crisis, his economic crisis.

Obama announced his proposal to prop up the collapsing housing market today in Phoenix (one of the country’s foreclosure capitals). Having obviously learned from the debacle of Geithner’s banking plan roll-out, today’s proposal was both larger ($75 billion rather than $50 billion) and more detailed than many expected. The proposal has its faults — it is more costly than necessary and includes cram down provisions — but I expect it to be effective, and I’m glad to see the focus on servicer and homeowner incentives. The White House has published an executive summary of the plan (PDF) and an online Q&A. Here are a few of the plan’s strengths and weaknesses:

The good:

More homeowners in good standing can refinance. Currently one generally has to have a loan-to-property-value ratio (LTV) of 80% or less in order to refinance. Since interest rates are at historic lows, nearly all mortgage holders would benefit from refinancing, but because property values have fallen sharply in the last year and a half, many homeowners (even those who put up substantial down payments on their homes) have seen their LTV rise over that time, even as they made regular payments on their mortgages. Obama’s proposal would raise the maximum LTV limit to 105% for homeowners whose mortgages are already owned by Fannie or Freddie, which would allow up to 5 million households to refinance into the current lower rates.
Motivating mortgage servicers to modify at-risk mortgages. The plan would pay servicers $1,000 for each modified mortgage (and an additional $500 for mortgages modified before the borrower misses a payment). Additionally, the “pay for success” provision of the plan would pay servicers up to $3,000 over the next three years if the borrower successfully makes payments on the modified loan during that time. These provisions are crucial to providing servicers the incentive to modify loans, rather than foreclose. Since servicers receive fees when homes go through foreclosure, without such payments servicers might have an incentive to foreclose on securitized mortgages even if foreclosure is not in either the borrower’s or lender’s interests. (I have written about the relationship between servicer and investor incentives here.) This component of the plan would stem foreclosures, thereby keeping more families in their homes while also preventing additional house price declines in neighborhoods with many underwater mortgages.
Clear guidelines for efficient loan modification. Uniform guidelines will both make loan modification faster and cheaper for servicers (who are normally in the business of processing payments, not modifying contracts) and will also prevent homeowners from ending up back in complex mortgages with terms and fees they do not understand.
Support for Fannie and Freddie. The plan would expand federal support for Fannie and Freddie and increase the size of the GSEs’ mortgage portfolios in an effort to shore up confidence in the agencies and keep mortgage rates low.

The bad:

Bankruptcy court cram downs. As I argued earlier, allowing judges to write down mortgage principal in bankruptcy proceedings will likely increase future mortgage rates – exactly what the market does not need right now. Hopefully the rest of the proposal will make the incentives to modify mortgages strong enough that these cram downs will be uncommon.
Costliness. As my colleagues Chris Mayer, Tomasz Piskorski, and Ed Morrison at Columbia University have argued, giving servicers the incentive to modify mortgages is likely sufficient to bring about widespread modification. Yet Obama’s plan will also partially compensate investors when mortgages are modified. This seems unnecessary, since the “pay for success” provision should already motivate servicers to alter loans where modification is in the investor’s interests, so there is no need to additionally compensate those investors. Of course, it is possible that this component of the plan is simply a politically palatable way for the administration to pump capital into the troubled banking sector. But if the goal of the plan is to save the housing market at the least cost to taxpayers, this measure falls short.
No safe harbor provision. One worry is that even if servicers would like to modify mortgages, they may be unable to because securitization contract (the pooling and servicing agreement, or PSA) explicitly prohibits loan modification. In other cases, the PSA may be vague enough that the servicer risks an investor lawsuit if they modify mortgages. But (at least in the information I’ve seen so far about the Obama plan) there is no provision to protect servicers from such investor lawsuits, which could reduce the effectiveness of the modification incentives. This may turn out to be an unfounded worry – investors might worry that Congress would hit back hard if they pursued such a lawsuit, and the cram down provision may motivate investors to allow loan modification to avoid principal write downs in bankruptcy court – but I am troubled to see no mention of safe harbor provisions in the proposal so far.

On balance, the Obama plan will likely bring a much needed boost to the housing industry, and it’s about time that housing is recognized as a crucial component of reviving the economy. Let’s just hope the proposal’s faults don’t slow the path to recovery too much.

On March 4, 2009, the Obama administration began the most ambitious effort since the 1930s to help troubled homeowners, offering lenders and borrowers big incentives and subsidies to try to stem the wave of foreclosures. Administration officials estimated that the plan will help as many as four million people avoid foreclosure, at a cost to taxpayers of about $75 billion over the next several years.

The plan is bolder and more expensive than any of the Bush administration’s programs, which were based almost entirely on coaxing lenders to voluntarily modify loans. While the number of loan modifications has climbed sharply, the number of foreclosures skyrocketed to 2.2 million at the end of 2008, a record.

The new plan is intended to win much bigger concessions from lenders by offering a mix of generous financial incentives and regulatory arm-twisting. The final impact will depend on how both lenders and the investors who own mortgages respond, but housing experts said the administration had a good chance of achieving its goal.

The Treasury has instructed Fannie Mae and Freddie Mac, the two government-controlled mortgage-finance companies, to refinance homeowners at today’s low market rates even if the owners have less than the standard 20 percent equity that is usually required.

Under the new loan modification guidelines, the Treasury will offer mortgage-servicing companies upfront incentive payments of $1,000 for every loan they modify and additional payments of $1,000 a year for the first three years if the borrower remains current. The Treasury will also chip in $1,000 a year to directly reduce the borrower’s loan amount, if the borrower stays up to date on payments.

But the biggest subsidies are in reducing the size of a person’s monthly payment. If the lender reduced the borrower’s monthly housing payment to 38 percent of the household’s gross monthly income, the Treasury Department would match, dollar for dollar, the lender’s cost in reducing payments down to 31 percent of monthly household income.

In releasing detailed guidelines on the plan, first unveiled Feb. 17, the Treasury Department made it clear that the program would not help every homeowner in trouble. It will do little to help families whose income has evaporated because one or more breadwinners have lost their jobs, nor will it save those swamped by big debts beyond their mortgages. It will not do much for homeowners who are current on their loans but “upside down” — owing more than their houses are worth.

In boom-and-bust housing markets like Florida, Las Vegas, Phoenix or California, where values have fallen 30 percent to 40 percent, the plan leaves many in homes they cannot afford — some because they borrowed recklessly, others because they were buffeted by the market swings. About 20 percent of the country’s 50 million mortgage holders owe more than 105 percent of their house’s value, and so do not qualify for refinancing under the plan, according to J.P. Morgan.

Refinancing is only for loans owned or backed by Fannie Mae and Freddie Mac, or roughly half of all homes. Homeowners can tell whether the agencies back their loan by calling their mortgage companies. For other borrowers, the government plan subsidizes lenders who modify loan payments, but only on loans below $729,750.

In tandem with President Obama’s new housing plan, Congress considered a measure that would allow bankruptcy judges to change mortgage terms to help homeowners avoid foreclosure, granting new authority some lawmakers say is central to easing the housing crisis.

Backed by bankers and other financial groups, many Congressional Republicans and some Democrats balked at the plan, saying that it would drive up mortgage costs. An earlier version of the measure had been blocked by Republican opposition in the Senate in April 2008.

In early March 2009, House Democratic leadership said it was confident it had the support to pass the measure because of changes won by Democrats who said they feared that homeowners might use bankruptcy to win reductions in mortgages they could still afford. But the measure failed in the Senate after intense lobbying by the banking industry.

In May, two months after the program went into effect, about 55,000 homeowners had been extended loan modification offers. At the same time, foreclosures continued apace. RealtyTrac reported that foreclosure filings reached 342,000 for April, up 32 percent from April 2008. Moody’s has estimated that more than 2.1 million homeowners will lose their homes in 2009.

Because of the size and complexity of the modification program, the Obama administration has only recently assembled most of the pieces. In late April, officials fleshed out their plan to modify or forgive second mortgages — one of the big stumbling blocks in modifying primary mortgages — and provided more details on the Hope for Homeowners program, for borrowers who owe more than their homes are worth. Congress is close to acting on legislation to protect mortgage servicers from potential lawsuits from investors, while also expanding the Federal Housing Administration’s ability to modify loans.

While it is still too early to know how effective the program will ultimately be, many homeowners who have tried to gain entrance say they have been successful only through persistence — and sometimes, the help of a lawyer.

What may be a larger issue, however, is the continuing deterioration of the economy, experts say. The longer it takes to set the program in motion, they say, the fewer people will qualify for modifications. The expected rise in unemployment in coming months may keep a growing number of homeowners out of the program.

TO stanch the hemorrhage of foreclosures, we don’t need another bailout. What we need is a fix — and the wisdom to see what is in our own self-interest.

An avalanche of foreclosures is coming — as many as eight million in the next several years. The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won’t fix the problem.

For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages because of the various deals we’ve made to support the banks.

For these non-prime mortgages, there is room to make generous principal reductions, without hurting bondholders and without spending a dime of taxpayer money, because the bond markets expect so little out of foreclosures. Typically, a homeowner fights off eviction for 18 months, making no mortgage or tax payments and no repairs. Abandoned homes are often stripped and vandalized. Foreclosure and reselling expenses are so high the subprime bond market trades now as if it expects only 25 percent back on a loan when there is a foreclosure.

The taxpayers need not and should not be responsible for making up the difference between the payments due bondholders before a loan is modified, and those due after modification. Why? Because the bondholders and the banks, the ultimate beneficiaries of homeowner payments, will be better off if mortgages are modified correctly and foreclosures stopped. The government “owes” them nothing more than that.

Why is writing down principal, which the Obama plan rejects, so critical to stopping foreclosures? The accompanying chart, courtesy of Ellington Management, an investment firm in Old Greenwich, Conn., tells the story.

It shows that monthly default rates for subprime mortgages and other non-prime mortgages are stunningly sensitive to whether a homeowner has an ownership stake in his home. Every month, another 8 percent of the subprime homeowners whose mortgages (first plus any others) are 160 percent of the estimated value of their houses become seriously delinquent. On the other hand, subprime homeowners whose loans are worth 60 percent of the current value of their house become delinquent at a rate of only 1 percent per month.

Despite all the job losses and economic uncertainty, almost all owners with real equity in their homes, are finding a way to pay off their loans. It is those “underwater” on their mortgages — with homes worth less than their loans — who are defaulting, but who, given equity in their homes, will find a way to pay. They are not evil or irresponsible; they are defaulting because — for anyone with an already compromised credit rating — it is the economically prudent thing to do.

Think of a couple with a combined income of $75,000. They took out a subprime mortgage for $280,000, but their house has depreciated to a value today of $200,000. They’ve been paying their mortgage each month, about $25,000 a year at a 9 percent rate including principal and interest. But the interest rate is not the problem. The real problem is that the couple no longer “own” this house in any meaningful sense of the word.

Selling it isn’t an option; that would just leave them $80,000 in the hole. After taxes, $80,000 is one and a half years of this couple’s income. And if they sacrifice one-and-a-half years of their working lives, they will still not get a penny when they sell their home.

This couple could rent a comparable home for $10,000 a year, less than half of their current mortgage payments — a sensible cushion to seek in these hard times. Yes, walking away from their home will further weaken their credit rating and disrupt their lives, but pouring good money after bad on a home they do not really own is costlier still. President Obama’s plan does nothing to change the basic economic calculation this hard-pressed family and millions of others like it must make. The Obama strategy — which involves reducing their interest rate for five years and giving them, at most, $5,000 for principal reduction over five years — will still leave them paying much more than the $10,000 it would cost to rent.

And five years later, after the Obama plan has run its course, this couple will still not “own” this house. Those who accept an interest modification under that plan are likely to realize at some point that they are essentially “renting” a home and paying more than any renter would. Many of those families will re-default, and see their homes foreclosed.

Bondholders today anticipate making as little as $70,000 on a foreclosed home like that in our example. But consider how much might change simply by writing down the principal from $280,000 to $160,000, 20 percent below the current appraised value of the house. The homeowner might become eligible to refinance the $160,000 loan into a government loan at 5 percent, which would be impossible on the $280,000 mortgage.

Even if the couple couldn’t refinance and still had to pay the original rate of 9 percent, the payments would be reduced to $14,400 a year, considerably less than the $25,000 now owed, and no longer wildly more than renting would cost. And the couple would have $40,000 of equity in the house: a reason to continue to pay, or to spruce up the house and find a buyer. Either way, the original bondholders would have a very good chance of making $160,000, instead of the $70,000 expected now. Everybody wins.

If writing down principal is such a good idea, why aren’t banks and servicers (the companies that manage the pools of mortgages that have been turned into investment vehicles) doing it now? Many banks are not marking their mortgages down to the foreclosure values the market foresees, hoping instead that we taxpayers will buy out mortgages at near their original inflated value —another government bailout. Reducing principal would force them to take an immediate markdown, but a smaller one. The servicers, meanwhile, are afraid that bondholders, their clients, will sue them if they write down principal — a real prospect because the contracts that allow servicers to modify securitized mortgages put restrictions on the kinds and number of modifications they may make. Moreover, making sound modification decisions is costly; servicers don’t want to spend the money and lack the personnel to do the job.

Beyond all that, the servicers have a conflict that all but guarantees they will not modify loans to maximize bondholder value. Once a homeowner is in default, the servicer must advance that homeowner’s monthly payments to the bondholders, getting repaid itself only when the house is sold or the loan is modified. So cash-strapped servicers want to foreclose prematurely or do a quick-and-dirty modification (without due diligence and thus without considering principal reduction) to get their money back fast.

Paying servicers, these conflicted agents, $1,000 per mortgage to reduce interest payments, as the Obama plan provides, is a bad use of scarce federal dollars. Last October, on this page, we proposed that Washington pass legislation that would remove the right to modify loans or decide on foreclosure from the servicers and give it to community banks hired by the government. These community organizations would have the power to modify mortgages (including reducing principal) when doing so would bring in more money than foreclosure — particularly loans that are now current but are in danger of delinquency. Those now current would be presumed ineligible if they default before the trustees arrive to modify. Our plan is simple and would require little government spending, somewhere from $3 billion to $5 billion over three years, as opposed to the $75 billion or higher price tag for the Obama plan.

We know there are some who will be outraged at the idea that their neighbors might get a break, while they — so much more responsible — get nothing. To these outraged folks we say, you would benefit too. It is not just your home values and your neighborhoods that will deteriorate if you insist that your underwater neighbors not get relief; it is your tax dollars and that of your children that will be needed to make up for the plummeting value of those toxic assets held by banks, which we taxpayers now guarantee and may soon own outright. It is your job that will be at stake when your neighbors can no longer afford to buy goods and services, causing more companies to cut jobs. So you need to act responsibly again, for your own sake and for the welfare and future prosperity of the entire nation.