Which homeowners to help

The best solution is to focus on folks who were duped by unscrupulous lenders, but who can still come up with mortgage payments if they receive a loan modification. President Obama said this morning that his housing plan "will not reward folks who bought homes they knew from the beginning they would never be able to afford.” He also says that speculators will not benefit. But the NYT's Dave Leonhardt notes at Economix that "the lines aren’t quite as clear as Mr. Obama suggested." Actually, the plan will help people who should have known they would never be able to afford their house. Parsing out the responsible from the irresponsible will be next to impossible.

Certainly, some who took out a reasonable mortgage and later lost their job will be helped. But people who bought too much house — and banks that allowed people to do so, or even encouraged them to do so — will also benefit. As distasteful as this may be, it’s the only way to make a serious dent in foreclosures and, in the process, to help the financial system. These same political calculations help explain the public emphasis that the White House is giving to the relatively modest steps it is taking to help underwater homeowners — those with a mortgage worth more than the value of their house — who can afford their monthly payments.

Another problem: The plan to reduce mortgage payments for homeowners – essentially a subsidy that goes to the lender – lasts for five years. After that, the government sponsored adjustable-rate mortgages will reset. The promise is to keep the reset to an affordable level, but as John Carney notes at Clusterstock, doesn't this merely prolong the pain of owning something that many folks simply can't afford?

Now if you expect that the housing market will quickly recover, you can argue that homeowners who cannot afford to make payment once the subsidies are gone will be able to sell their homes. This, of course, is precisely the bet that the old, bad-ARM lenders made. But now that it's the government making this bet, we suppose we can all breathe easy.

Here’s the NYT overview of the plan.