Obama Administration Announces New Details on Making Home Affordable Program

This is really a public service announcement. I hope it helps you, or maybe you can pass it long to someone who needs the information.

If you know anyone that actually received a new mortgage under the Making Home Affordable Program let us know.

My guess based on what I have hear, and from talking to mortgage bankers, is that this plan is going no where fast. I hope I am wrong.

Some the key points:

• The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate.

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• Hope for Homeowners requires the holder of the mortgage to accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan. Refinancing into a new loan below the home's market value takes a borrower from a position of being underwater to having equity in their home. By increasing a homeowner's equity in the home, Hope for Homeowners can produce a better outcome for borrowers who qualify.
• Under the changes announced today and, when evaluating borrowers for a Home Affordable Modification, servicers will be required to determine eligibility for a Hope for Homeowners refinancing. Where Hope for Homeowners proves to be viable, the servicer must offer this option to the borrower. Note mine: I really have no idea what this means, if you do, hit the comments box.
• Continuing to bolster its outreach around the program, the Administration also announced today a new effort to engage directly with homeowners via MakingHomeAffordable.gov. Starting today, homeowners will have the ability to submit individual questions through the website to the Administration's housing team. Members of the Treasury and HUD staffs will periodically select commonly asked questions and post responses on MakingHomeAffordable.gov. To submit a question, homeowners can visit www.MakingHomeAffordable.gov/feedback.html. Selected questions from homeowners across the country and responses from the Administration will be available at www.MakingHomeAffordable.gov/asked-and-answered.html.

More detailed Information:

• To read the press release -- go here.
• Second Lien Program Fact Sheet
• Second Lien Program Case Examples

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Bank Prime Loan Rate -- Current and Long Term Graph

Current 3.25 percent. All Time High, 21.50 Percent, December, 1980. H.15 Selected Interest Rates

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Kindle 2: Amazon's New Wireless Reading Device (Latest Generation)

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Shhhh-----Don't Tell Anybody

The ban on foreclosure sales and evictions from houses owned by mortgage giants Fannie Mae and Freddie Mac is over. The Plan which began as a high-profile effort just before the holidays to keep people in their homes as the government tried to come up with homeowner rescue plans was announced with great fanfare.

The ban ended on March 31, but I bet most of you are hearing about it for the first time right here.

There is some good news,

A foreclosure sale may not occur on any Fannie Mae loan until the loan servicer verifies that the borrower is ineligible for a Home Affordable Modification and all other foreclosure prevention alternatives have been exhausted.

Brad German, a spokesman for Freddie Mac, said he was “mystified” as to how anyone could be surprised by the ban’s expiration. The idea behind it was to give the government time to create homeowner rescue plans, and that’s been done, he said. Neither agency also expects a flood of homeowners out on the street because the ban is being lifted, he added.

“For all practical purposes, people will be in their homes for a while,” despite the ban’s expiration, German said. Fannie and Freddie will need time to approach tenants and homeowners and figure out whether they are qualified for help, he said.

If you would like to read a very good article on this topic go here--

Fannie, Freddie Quietly Lift Moratorium on Foreclosures

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Consumers go into the Tank on all Fronts

According to the American Bankers Association, which represents most large U.S. banks and credit card companies, the percentage of consumer loans at least 30 days late rose to a seasonally-adjusted 3.22% in the October-to-December period from 2.9% in the prior quarter.

Home equity loan delinquencies rose 40 basis points to 3.03 percent of accounts, setting a new record. Home equity lines of credit delinquencies also reached a new record, rising 31 basis points to 1.46 percent. Every category saw rising delinquencies except mobile home loans. The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

Credit card delinquencies also increased from 4.20 percent to 4.52 percent but still remain near the four year average of 4.47 percent. Chessen says the ability of card holders to adjust their monthly payments – unlike other loans with fixed payments – has helped keep credit card delinquencies relatively stable.

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The fourth quarter composite ratio is made up of the following closed-end loans. All figures are seasonally adjusted based upon the number of accounts.

• Home equity loan delinquencies increased from 2.63 percent to 3.03 percent.
  
• Property improvement loan delinquencies increased from 1.63 percent to 1.75 percent.
  
• Indirect auto loan delinquencies increased from 3.25 percent to 3.53 percent.
  
• Direct auto loan delinquencies increased from 1.71 percent to 2.03 percent.
  
• Marine loan delinquencies increased from 1.82 percent to 2.35 percent.
  
• RV loan delinquencies increased from 1.27 percent to 1.38 percent.
  
• Mobile home delinquencies decreased from 3.08 percent to 2.96 percent.
  
• Personal loan delinquencies increased from 2.69 percent to 2.88 percent.
  

Sources: Consumer loan delinquencies hit record high

CONSUMER DELINQUENCIES CONTINUE RISING AS RECESSION INTENSIFIES
IN FOURTH QUARTER 2008

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Geithner to Face Congress

Treasury Secretary Timothy Geithner is scheduled to face Congress today and again on Thursday.

Today, Geithner is likely to be grilled on the handling of the AIG bonuses and the new Public Private Investment Program (PPIP). Congress is certain to be in a tizzy about the plan's loan structure, particularly the granting of non-recourse loans to participating hedge funds.

Given the strong positive reaction in the stock market, the House of Representatives Financial Services Committee is likely to take a less adversarial tone then it might have last week.

On Thursday, Geithner will appear in front of the same House of Representatives Financial Services Committee. The hot scheduled topics is "systemic risk". Sure to be a hot potato in today's environment.

The discussion and debate about systemic risk will include ideas and plans about how large financial institutions should be regulated in the future. This is sure to develop into a turf war. The remedy could be as simple as giving additional authority to existing agencies. Or, given congresses penchant for creating new entities, spending money, and creating jobs to help keep themselves in office a new kind of super agency could be on the table.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Give Me Some of Dem Non-Recourse Loans--How the Toxic Asset Scheme Works

Duh, I want in. I want some of dem non-recourse loans.

You might be thinking what the heck? What is a non-recourse loan?

It is what you got when you took out a subprime mortgage. You put up a tiny down payment, zero. You purchased a $500,000 house (hopefully you did this in 2004, not 2006) for no money down and you now controlled $500,000 of real estate. If the value of the home went up, to say, $550,000 and you sold it, you made a gigantic return on your investment. Infinity, actually, since you put up nothing. What if the value of the home went down? Well this was the non-recourse part of your loan. You threw the keys on the table and walked away, and left the problem to your not so friendly neighborhood banker.

Now let's get to the non-recourse loan feature of the brand spanking new--Tim GeithnerToxic Asset Disposal Plan for Banks. These numbers are a bit bigger and the terms while fantastic are not quite as good as a zero down subprime loan.

Let's say you and your buddies decide to buy about $100 million of the sub prime crap that is laying around in your favorite neighborhood bank. The bank can't find buyers for this stuff at a real price, so your Uncle Sammy is going to give you the opportunity of a lifetime.

Now let's say you decide those $100 million of subprime loans are now worth $70 million (at this point your banker is out having a $600 lunch and thinking once again--there is a sucker born every minute). Little note here: I am going to round off the numbers to make this easy to understand.

To get control of those $70 million in subprime mortgages you will need to put up 5 million bucks. Uncle Sammy is going to put up 5 million bucks right along with you--you are now partners with Uncle Sammy (dig that).

Here is the good part--Uncle Sammy's little brother, the FDIC, is going to lend this partnership 60 million bucks. And guess what, if things don't work out, you throw the keys on the table, walk away, and tell the FDIC--eat a banana. Just like the subprime borrower. In other words, you don't have to pay back the loan which was non-recourse.

Now let's say those $70 million of subprime loans you bought actually go up in price. Walla. Windfall profit. Let's dream big and say they go all the way back up to $90 million. Here is what happens.

The little brother FDIC gets his $60 million back (and a tiny amount of interest so he doesn't feel like a complete fool). The remaining $20 million is split equally between you and Uncle Sammy. You got it. You risked $5 million and you made $10 million. A 200 percent return.

On the other hand--if those $70 million in sub prime loans you bought go to zero--the most you can lose is your original $5 million. In other words, Uncle Sammy losses $5 million, you lose $5 million, and the dumb banker, in this case the FDIC, losses $60 million.

I am going to stop here because I learned a long time ago that it is hard to get anyone on the Internet to read more than 600 words in one bite. But, I promise you there is more to this that I would like to discuss with you. So come back later for part two.

While you are at it, email this to someone you know that likes to make comments. We need some comments in here. And remember, Don't Fight the Tape.

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Everything You Wanted to Know About the Public Private Investment Program (PPIP)

For all the information about the Public Private Investment Program (PPIP) go to Financial Stability.gov.

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The Public-Private Investment Program for Legacy Assets--Examples and Specifics

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector in this example, $84 would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis using asset managers approved and subject to oversight by the FDIC.

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The Public-Private Investment Program for Legacy Assets

To address the challenge of legacy assets, Treasury in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

* Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.

* Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.

* Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.

Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:

* Legacy Loans:The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.

* Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

If you are having a problem viewing the above illustration join the club. Even in the PDF you have to zoom up to at least 150 percent.

The Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.

* Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.
* Using FDIC Expertise to Provide Oversight: The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.
* Joint Financing from Treasury, Private Capital and FDIC: Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.
* The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:
o Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets usually a pool of loans they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
o Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
o Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
o Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

The Legacy Securities Program: The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.

1. Expanding TALF to Legacy Securities to Bring Private Investors Back into the Market: The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).

• Providing Investors Greater Confidence to Purchase Legacy Assets:As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
• Funding Purchase of Legacy Securities: Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.
• Working with Market Participants: Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.

Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds: Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.

• Side-by-Side Investment with Qualified Fund Managers: Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.
  
  
• Offer of Senior Debt to Leverage More Financing: Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.

Sample Investment Under the Legacy Securities Program

Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

The Housing Bailout--How did they get there?

The long awaited housing bailout will be announced today. The biggest issues surround which homeowners win and which homeowners lose. The biggest losers will be homeowners who have been living in their homes for a long time and making their payments. They will get nothing and will help pay the loans of home owners in trouble.

The big question is will the Obama plan include homeowners who put nothing down, have no job, and no assets and received a mortgage--NINJA loans. The next group in trouble are homeowners that simply cannot afford their home. Will the homeowners who never were going to be able to afford the home they purchased get bailed out? The current estimate is a whopping 3 million homeowners fall into these categories. Should they be bailed out? Or, should the lenders be forced to eat the loans.

The most vulnerable group are homeowners that are making payments but now see their houses underwater. The first question I would ask is how did they get there? My mother has a neighbor with a house that is $150,000 underwater. However, prior to that purchase she sold a house and realized a gross gain of $550,000. Should she receive help?

It is now estimated that about 10 million homeowners are making their payments but own homes that are worth less than the mortgage they are paying. It appears they get nothing in the housing bailout. Once they see deadbeats and fools getting bailed out will they decide to walk away from their mortgage? If they do, the housing bailout will ultimately fail. This will occur because the housing market will continue to worsen for years and be a continued drag on the economy? Or will it?

Housing accounts for about 6 percent of Gross Domestic Product. Meanwhile, retail sales accounts for 66 percent. Are we focusing in the right place?

Is the housing bailout about consumers or is it about banks. I think you already know the answer.

Your thoughts, perspective and comments are welcome.

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Economic Scene

Bailout Likely to Focus on Most Afflicted Homeowners

By DAVID LEONHARDT

The long-awaited housing bailout will finally be announced on Wednesday.

In a speech in Phoenix, a signature real estate boomtown gone bust, President Obama will explain his plan to reduce foreclosures. And the key to understanding that plan will be remembering that there are two different groups of homeowners who are at risk of foreclosure.

The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes.

The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater. If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off.

Scratch beneath the details of any housing bailout proposal, and the fundamental issue is whether it tries to help the second group or just the first.

Mr. Obama has evidently decided to focus on the first group, based on the previews of his speech that aides have offered. In coming weeks, his administration will begin spending $50 billion to entice banks to reduce the monthly payments of people who otherwise couldn’t afford to stay in their houses. In effect, the government will split the losses on these mortgages with banks.

The $50 billion will come from the money Congress has already allocated for the bailout of the financial system. It is likely to be aimed at people who need a significant, but not an enormous, amount of help to meet their mortgage payments.

There are some big advantages to this approach. Bailing out all underwater homeowners would be tremendously expensive. All told, about $500 billion in mortgage debt is already underwater, and it’s impossible to know in advance who is likely to walk away. So the government would have to spend hundreds of billions of dollars to help millions of people who don’t need help staying in their homes.

But the Obama approach also brings risks. The administration is betting that few of those 10 million underwater homeowners will walk away. (A year from now, the number will about 15 million, Moody’s Economy.com projects.) If they begin to abandon their homes in large numbers, however, they will aggravate the housing bust and the financial crisis — and probably force the administration to come up with a new, much larger housing bailout down the road.

In that case, the speech that Mr. Obama is making in Phoenix could come to look like a rose-colored bit of incrementalism, which happens to be the very criticism that Obama advisers have leveled against the Bush administration’s response to the housing bust.

Underwater homeowners clearly face a difficult choice. By walking away from a house and then renting a similar one in the same town, many could save themselves a lot of money. And those who need to move — to take a new job, for example, or to marry — may have little choice but to default. They may not get enough from a sale to pay off the mortgage.

On the other hand, defaulting will wreck a homeowner’s credit rating. For families that don’t need to move, doing so will also bring other headaches and costs. They will be leaving behind their homes. Many other people may continue to make their payments simply because they think it’s the right thing to do.

The current housing bust doesn’t have a good recent historical analogy. It’s too big. But there have been some serious regional housing slumps that may offer a window into how underwater homeowners will behave this time.

Three economists at the Federal Reserve Bank of Boston recently did an analysis along these lines, looking at the Boston area in the early 1990s. From early 1989 until late 1991, prices in Boston fell 15 percent. They did not return to their 1989 peak until 1997.

Yet only 6.4 percent of homeowners who had been underwater at the end of 1991 were eventually foreclosed on. And the majority of these foreclosed homeowners weren’t merely underwater; they were also unable to make their monthly payments, because of the severe recession hitting New England at the time, as Chris Foote, an economist at the Boston Fed, told me. They are the kind of people the Obama plan is meant to help.

In all, maybe only 1 or 2 percent of underwater homeowners walked away even though they could make their payments. Mr. Foote and his colleagues predict that the nationwide foreclosure rate over the next few years will be higher than it was in Boston, but not radically so.

For most people, the Fed economists write, being underwater “is a necessary but not a sufficient condition for foreclosure.”

Now, not all economists buy this argument. They say that the psychology of the current bust is different from what it was in Boston in the early 1990s. In a handful of metropolitan areas, including Phoenix, prices have fallen almost 50 percent from their 2006 peak.

Homeowners in such places may wonder if their houses will ever be worth more than their mortgages. So fairly small changes in their lives — like a reduction in work hours or the breakdown of a car — may lead them to walk away from their homes.

“I would not minimize that risk at all,” said Frederic Mishkin, a member of the Fed’s board of governors until last year.

If even 10 percent of the underwater homeowners walked away, Mr. Mishkin notes, foreclosures would soar, exacerbating the economy’s many problems.

Other economists who share his view are calling for across-the-board programs that would reduce interest rates or otherwise juice the housing market. They are worried that without bolder government actions, the housing market will continue to spiral downward.

In the end, the choice between the two approaches becomes a matter of cost-benefit analysis. The more aggressive approach would almost certainly do more to reduce foreclosures. But it would also be enormously more expensive.

If the economists from the Boston Fed are right — or even close to right — then the aggressive approach may cost something like $500 billion to prevent 500,000 foreclosures.

That’s $1 million per prevented foreclosure. Is that really worth it? Or could the money be better spent in other ways? (There is also the small matter of whether Congress would be willing to spend another $500 billion anytime soon.)

Mr. Obama is apparently going to try to get more bang for the buck by focusing on those homeowners who would certainly lose their homes without government help.

The plan will also help some underwater homeowners refinance their mortgages, but that won’t be the emphasis.

The administration’s next task is to execute its plan better than the Bush administration executed its various housing plans. That will mean offering subsidies that are big enough to persuade banks, finally, to rewrite mortgage terms.

It also might help to suggest that the federal government would look unfavorably on any bank that did not make good use of those subsidies. After all, the government is now a shareholder in many banks.

E-mail: leonhardt@nytimes.com

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Obama May Press Banks to Cut Mortgage Payments

This is a wonderful idea that will sound good but won't help many. If you want to understand the problem you need to look beyond the obvious. The obvious--about 9 percent of all mortgages outstanding are delinqunet or in foreclosure. The number of homes going into to foreclosure is forecast at 3 million plus. But, how accurate is that number. Down here in Florida banks are dragging their feet on foreclosures. Delinquent right now, expect 1-2 years before the foreclosure happens. So, its likely that time bomb is still ticking.

Let's say they gave every eligible owner a fixed rate mortgage at 4.5 percent. How many home owners would this benefit? How many of these delinquent owners can afford that price. Next let's say they "cram" down the mortgage to near market prices? How many would benefit? Does anyone know the answer to these questions? Does anyone have a number on what it would take to bring supply and demand into balance.

Supply and demand is really the critical issue. Here is what we know. An enormous amount of buyers bought their houses with zero down. So they started with zero equity. How many buyers bought their houses with zero documents? How many NINJA loans are outstanding--no income, no job, no assets. How many Toxic Option Arms?

Wouldn't it be a good idea to first understand the size and dimensions of the problem. To define the problem and then devise the solution? I guess not.

From the NY Times:

President Obama’s plan to reduce the flood of home foreclosures will include a mix of government inducements and new pressure on lenders to reduce monthly payments for borrowers at risk of losing their houses, according to people knowledgeable about the administration’s thinking.

The plan, to be announced Wednesday, is expected to include government subsidies for reducing a borrower’s interest rate, which a lender would have to match with its own money.

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Bailing Out NINJA Homeownwers will never work

Bailing out homeowners will never work. What is the government going to do about some one that was never qualified to buy a $500,000 dollar home in the first place.

To start out, the homeowner bought something that was overvalued and is not likely to return to that price in the next decade. The value today might be $300,000. This leaves the buyer with a net worth of negative $200,000 to start. Once their NINJA loan trips from the teaser interest rate to an at market interest rate they can't afford to pay the monthly mortgage. What makes the government think they will be able to pay a $300,000 mortgage? Wouldn't they be better off renting an apartment (or for that matter a house) they can afford? I often think, where did these buyers come from in the first place? Were they a first time buyer that was enabled by the "scam" being perpetrated in the housing market? Did they sell an existing home and put the gain down on the new, bigger, inflated home (not likely)? Are they credit worthy at any price?

I finally read a good article about the so called housing bailout over on the Wall Street Journal.

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.

Why Be a Nation of Mortgage Slaves?

*****NINJA loan--no income, no job, no assets

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