Obama mortgage debt relief plan announced

Today the Obama administration announced plans to slash mortgages for unemployed homeowners.  From The Washington Post:

The Treasury Department said adjustments to the Home Affordable Modification Program and the Federal Housing Administration program would help "responsible homeowners who have been affected by the economic crisis through no fault of their own" by expanding flexibility for mortgage servicers and originators to assist more people who are unemployed and who have been hit by falling home values.

"These changes will help the administration meet its goal of stabilizing housing markets by offering a second chance" to as many as 3 million to 4 million struggling homeowners through the end of 2012, Treasury said in a statement. It said costs would be shared between the private sector and the federal government, with the federal costs funded through a $50 billion allocation for housing programs under the Troubled Asset Relief Program.

Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, a lender could allow a borrower to skip payments altogether under the plan.

 In addition to helping the unemployed the program features four other key provisions:

The first key is that the government will provide financial incentives to lenders who cut the balance of a borrower's mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.  [snip]

Second, the government will double the amount it pays to lenders who help modify second mortgages, such as piggyback loans, which enabled home buyers to put little or no money down, and home equity lines of credit. [snip]

Third, the new effort also increases the incentives paid to those lenders who find a way to avoid foreclosing on delinquent borrowers even if they can't qualify for mortgage relief. For example, the administration is scheduled to launch a program next month encouraging lenders to have borrowers sell their homes for less than the mortgage balance in what is known as a short sale.

Fourth, the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan. The FHA will offer incentives to lenders that reduce the amount borrowers owe on their primary mortgages by at least 10 percent.

Kevin D. Williamson at the NRO Corner is skeptical:

Indeed, the administration is clearly having night terrors about a second financial crisis being spurred by a deepening wave of mortgage defaults, so the program is full of Rube Goldberg stuff to bribe and cajole bankers and keep them from foreclosing on defaulting borrowers. The Post reports that the "new effort also increases the incentives paid to those lenders who find a way to avoid foreclosing on delinquent borrowers even if they can't qualify for mortgage relief."

Let's repeat that. These borrowers: A., are delinquent; B., don't qualify for any existing mortgage-restructuring programs; so, C., Uncle Sam is just going to keep throwing money at the bankers, basically shelling out whatever it takes to keep these delinquent borrowers in their houses, these delinquent loans on the books, and housing prices leaning on yet another political manipulation of the real-estate marketplace. And the theory is: this will stabilize the market. Real-estate investors may seem kind of stupid sometimes, but they are not that stupid.

Let's hope that in November, voters are not that stupid either.