Amir Sufi, an economist at the University of Chicago Booth School of Business, sent some quick thoughts about President Obama's new plan for helping homeowners avoid foreclosure. We're aiming to talk to him more this week, for the podcast. For now, he writes:
The primary focus of the plan is to bring down interest payments on mortgages, but the plan does nothing to help reduce mortgage principal. As a result, the Obama administration is relying heavily on the notion that households will continue to pay their mortgage if they have a lower interest payment, even if the value of their home is less than the value of the property. I fear that it won't work.
If I am a homeowner with a house worth $100K and a mortgage worth $150K, I have a strong incentive to walk away from the home even if the mortgage interest rate is substantially lower. Once again, the government seems very hesitant to implement any proposal that would lead to a write-down of mortgage principal — the focus is exclusively interest rates.
From what I can tell, this plan, like the Hope for Homeowners program passed in July of 2008, does not make renegotiations of subprime mortgage contracts by lenders mandatory. It provides many incentives, but, at the end of the day, the servicers of subprime mortgages may still decide that do not want to participate. I am putting faith in the policy-makers within the Obama administration that the incentives provided to servicers and creditors are more likely to result in renegotiation of subprime mortgages, unlike the dismal failure of the Hope for Homeowners program.