US Homeowner Plan No Magic Bullet

Earlier Wednesday, President Obama unveiled his “Homeowner Affordability and Stability Plan.” We applaud the attempt to inspire fiscal responsibility in the borrowers and lenders, but we are not sure this proposal will ultimately resolve the problem swiftly or without the need for additional funding.

First, over the next several years the potential remains for up to 10 million homes to go into foreclosure. Under the President’s plan, about 5-6 million homes, or approximately half the potential, could still go into foreclosure over the next several years. If this were to become a reality, home prices would remain under pressure at least through the end of Presidential Obama’s current term.

Second, if home prices remained under pressure, we suspect additional funding would be necessary to continue to push mortgage interest rates below 5.00%, with the potential to broach 4.00% in order to digest the elevated level of foreclosures over the next several years.

In addition, the potential for increased delinquencies is high, as individuals that would not normally match the requirements look for ways to take advantage of the program to lower their mortgages and ultimately their payments. Overall this proposal would not eliminate the pressure that would be experienced by companies such as - but not limited to - Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), JP Morgan Chase (JPM) and Bank of America (BAC).

While President Obama’s proposal does address about half the problem, we would give the President’s proposal a C+/B- grade, and wait for some implementation.

Subscribe by RSS Subscribe by Email