Will Obama’s Mortgage Plan Work?


The big question about Obama’s mortgage rescue plan is pretty simple: will it work?

You can cut that question into various tranches. Will it keep people in their homes? Will it relieve the pressure on the financial markets from deteriorating mortgage backed bonds? Will it stop or slow the decline in home prices?

Only time will tell. But analyst predictions are starting to come in, and they bear a marked lack of Hope that Obama’s plan will Change very much. Bloomberg today runs through some analyst remarks from Bank of America and Barclays. Here’s how they break it down.

Prime-Jumbo Mortgages

Facts: Jumbo mortgage are home loans that are larger than what government chartered Fannie Mae and Freddie Mac are allowed to buy or guarantee.  The limits were recently increased but remain at $417,000 in most of the country (in some pricey areas the limit is as high as $729,000).  There are about $500 billion of prime-jumbo bonds outstanding, which is almost 5% of the $10.5 trillion of mortgages outstanding in the US.  About 5.29% of these are at least 60 days delinquent, and Wall Street analysts predict the numbers could go as high as 8 to 10 per cent.

Analyst Predictions: Only about 50 per cent to 60 per cent of securitized prime jumbo meet the loan-modification standards, according to a report yesterday by Bank of America analysts. A big stumbling block here will be the massive declines in home prices, which have put many jumbo mortgages far deeper “underwater” than the 105% limit in Obama’s plan.  Many of the jumbo mortgages may simply be too large to qualify for refinancing under the plan.

Alt-A Mortgages

Facts: The “Alt-A” designation applies to mortgages deemed riskier than prime mortgages but less risky than subprime. These went to borrowers who couldn’t prove their income and often had interest only adjustable rates.. There are something like $1 trillion of Alt-A mortgages outstanding. These have proved far riskier than many people expected, and a huge amount are now at risk of default and foreclosure. Around 23% of these are currently at least 60 days delinquent, and analysts expect this number to keep climbing.

Analyst Predictions:
Again, only about 50 per cent to 60 per cent of securitized Alt-A meet the loan-modification standards, according to a report yesterday by Bank of America analysts. And, again, the limits on how far underwater a loan can be to qualify for refinancing will prove a major stumbling block.  Also, a good deal of the Alt-A market was investment property, meaning the owners don’t live in the home—a crucial test under Obama’s plan.

Subprime Mortgages

Facts: These were the riskiest mortgages, and have suffered the highest rate of defaults. Almost 35% are now at least 60 days delinquent. There are around $1.5 trillion of subprime loans outstanding.

Analyst Predictions: Bank of America says that about 90 per cent of subprime mortgages will be eligible for refinancing. The problem, however, is the subprime mortgages have proven to have huge re-default rates. By some estimates, 60% of refinanced subprime mortgages redefault less than a year after the refinancing. Barclays analysts predict that payment reductions won’t be enough to significantly reduce the default rate.

The Bottom Line: In the market where homeowners will be most likely to qualify for refinancing—subprime—it’s not clear that refinancing will do much to prevent defaults. In markets where refinancing might have a better chance of preventing defaults, only about half the mortgages will qualify.