I agree that the main concern is that the plan does not go far enough. This is because the main proposal for struggling homeowners is to provide cash incentives to lenders. It is impossible for the policy wonks in Washington to predict just how many mortgages will be modified with the bonuses offered. If they are acting rationally (I know, a big if), the lenders have already done a calculation on every delinquent mortgage they hold, and they have already decided not to modify the vast majority of them. So the question is, will a few thousand more dollars (note that this is more than was initially proposed by Sheila Bair) tip the equation toward modification? And in how many cases? (There is one scenario under which this could unblock the modification process: perhaps the lenders have been holding out on modifications so as not to lose out on the government bonuses, and now that they know what the bonuses are they will start making modifications. But there’s no good way to predict the size of this effect.)
So I think that the Obama team has to be ready to sweeten the pot later – or take other, more aggressive measures – if this plan does not have the desired effect. Of course, if they were going to do that, they wouldn’t announce it now (because you don’t want lenders just to hold out for the next round of larger bonuses). So maybe that is the plan.
But on balance I think most of what is in the plan is helpful. If only it had come, say, twelve months ago.
Originally published at the Baseline Scenario and reproduced here with the author’s permission.
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