Bush's Band-Aid for Housing

Here in MB, we may feel insulated from the swirl of nastiness that surrounds the housing market nationally. But we must follow the news, as the broader problems and solutions will trickle up.

You know things are getting strange when the American president sees fit to stand in the Rose Garden and promise a solution to the housing market's woes, especially burgeoning foreclosures, as he did Friday. Mr. Bush's considered opinion is that:

[S]ome homeowners [took] out loans larger than they could afford, based on overly optimistic assumptions about the future performance of the housing market.

That must be obvious by now.

Mr. President, are you saying we should not be "optimistic" about the "future performance of the housing market"? Uh-oh. This guy is usually pretty optimistic.

And you know the news is probably bad when it's released on a Friday – getaway day for a long weekend, no less. (Ben Bernanke shot out a few of his own ideas Friday, too.)

Yes, Bush's plan is bad. Mostly because it's inadequate to "solve" the housing problem. There goes our president, bringing insufficient resources to the job again.

Bush is going to open the wallet of the Federal Housing Administration (FHA) to a subset of all home buyers with toxic loans, and help them refi. You can get a new FHA loan if:

• You have at least 3% equity in your house.
• You're not in default (unless you went into default after a "teaser" rate expired).
• You can prove you can make the payments on a 30-yr. fixed loan at about 6.5%.

That profile may sound reasonable, but the first problem is that 3% equity – by whose estimation, when? In lots of markets, even people who put down 10% or more two years ago don't have 3% equity today – and they're some of the "good ones" this plan is trying to rescue.

And about that 30-yr. fixed at 6.5 – a good rate – that's the sort of traditional financing most homebuyers of the last 5 years have been trying to avoid, for good reason. No wonder they are estimating this will cover just 1 in 6 of all new homeowners in trouble.

So the Bush plan suffers from several flaws:

• It's small. It is not even supposed to save 83% of the homeowners it is supposedly targeting. Perhaps 80,000 people will qualify. The mega-trend in foreclosures will continue.
• It's large. The FHA plan puts the government in the mortgage business on a wide scale. FHA won't (and can't) replace the private sector, but it could get the US on the hook for at least $25 billion in new mortgages on homes purchased during a bubble.
• It's for cheap markets. It doesn't apply to any loans over $362,790. (There's a chance they'll raise that to the conforming-loan limit of $417k – great, thanks.)
  

The Bush plan won't turn the tide back, it will just throw a life preserver to the "most deserving" and most stable recent homebuyers in the least-expensive markets in America. The FHA plan won't stop current trends in the market. It's CYA stuff to show that Washington is trying to do something.

Rest assured, this is just the opening volley in DC. As the market's woes grow (remember that chart with subprime going "China Syndrome" next year?), there will be political competition to solve a problem that seems, honestly, beyond the reach of do-gooders.

The roots of easy money were in "overly optimistic" global capital markets. Those markets have turned pessimistic now. Bush and Bernanke want to cheer them up again, but it's a long way back to 2005-06, or even back to July 2007.