The mortgage situation started out bad for President Obama. Bad timing and bad fortune more than bad judgment of course.
This is how the saga began:
Jim Johnson once received mortgages with favorable interest rates that were far above subprime, below the market rates for average mortgages, and even below the prime rate from Countrywide Financial. The loans were dolled out while Johnson was CEO of Fannie Mae. Despite this windfall, Johnson did not disclose his hook ups to his Fannie board. Fannie later needed a bailout for being overexposed to bad loans, and Countrywide was saved from annihilation by being folded into Bank of America, which also received a bailout. Interestingly enough, Jim Johnson was President Barack Obama’s handpicked man to vet vice presidential candidates.
Now, fast forward to present day, and Republicans are going all the way back to the Johnson ordeal to show the president’s predilection for handling the mortgage crisis. This is to be sure a very unfair use of partisan politics, but also a case of bad timing and bad fortune.
Johnson has nothing to do with the president’s plan to provide mortgage relief to existing homeowners or incentives for new home owners, but the plan is being cast in a negative light of being ill-timed and ill-conceived just the same.
This is mainly because the administration has overextended itself and because the Treasury Department has yet to define clear guidelines on loan modifications for existing homeowners who are underwater, and to facilitate aid to those who either took out second mortgages to pay their first, or to finance consumer debt and make home improvements for houses that had already lost their value.
So where is this all going?
RealtyTrac, a data firm that has been tracking home prices and foreclosures, counted more than 3 million foreclosures last year and has said this year could be worse. Many homeowners are holding second mortgages pending default or have already defaulted, and the issuer banks are holding bad paper on their balance sheets that they can’t repackage as asset-backed securities.
Bank of America, for instance, has said since it has to service these bad loans and has no idea how the Treasury will backstop the loans or intervene to fund shortfalls. In other words, it can’t do anything to help borrowers.
Citigroup, another big bank submerged by subprime lending, has essentially said the same thing.
Could the administration have anticipated that an estimated 11 million home owners would be underwater on mortgages that, if combined, stretch to financial liabilities into the hundreds of billions of dollars?
That answer is maybe. Given what was going on as far back as the fall of 2007, somebody in the Treasury or the Federal Reserve could have and should have seen this coming but as usual with elections, bank closures, two wars, a healthcare debate, rising unemployment and a recession, along with a fickle news cycle, the answer becomes not so much.
And that goes for Obama’s mortgage plan too.
Will it work with only tens of billions (approximately $75 billion actually) allocated and no clear deployment plan from Treasury?
Not so much, but here’s hoping for a solution…