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Obama Unveils $275 Billion Housing Plan to Stop Wave of Foreclosures

By: Steve Johnson

2/18/2009 - 12 Comments

Just yesterday, Obama signed a landmark $787 billion economic stimulus bill aimed at jolting the U.S. economy out of recession.

Today, he unveiled his much-anticipated plan to fight the housing crisis, pledging up to $275 billion to help stem a wave of foreclosures sweeping the country.

"All of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen--a crisis which is unraveling homeownership, the middle class, and the American Dream itself,"  Obama said in prepared remarks released on Wednesday.

At the end of last year, just over 9 percent of all home loans in the United States were in arrears or already in foreclosure, according to the Mortgage Bankers Association.  That’s almost 1 in 10 homes already in foreclosure. 

Obama said his plan was aimed at "rescuing families who have played by the rules and acted responsibly," refinancing traditional mortgages for up 5 million homeowners who now are close to owing more than their homes are worth.  Like if the government can determine who has been responsible and who has not.

The plan also adds major strength to the already government controlled mortgage giants Fannie Mae and Freddie Mac through Treasury funding (printing money and selling treasure bonds) so that they can buy up foreclosure homes.

The Treasury will increase its preferred stock purchase agreements with the two government-controlled companies to $200 billion each from $100 billion.  Also, the plan raises the limit on the size of the mortgage portfolios the two companies can hold by $50 billion to $900 billion each, along with a corresponding increase in their allowable debt outstanding.

What this means is that the government is going to borrow and print enough money to buy up many of the 9 percent of homes in foreclosure at higher prices than they are currently worth, so that home owners who cannot afford them can get out of these homes without going bankrupt or into foreclosure.  Then, the government could take many of these homes off the market until supply and demand are in line with each other and prices begin to stabilize.  Sometime after prices stabilize, the government will be able to begin selling the homes back into the market. 

It sounds like this plan may work, but it’s still going to be a long road, perhaps another 2-3 years to stabilize prices and the deepening recession is going to continue to put pressure on housing prices.  The bond market is starting to show signs of weakness, which could cause interest rates to rise.

The risks are high if the government does nothing, but they are even higher if they do this plan.  If the government had the money in reserve, like China or Japan, then this is a good plan. But, they don’t have any money and are risking a global run on the dollar by the massive increase in national debt that this plan requires.

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