Mortgages and Obama's First 100 Days

As President Obama passed the 100-day mark, many Americans were critiquing his performance. Much of the attention is on mortgages and their relationship to economic stimulus, and the potential for a sustained economic recovery in the housing market.

Loan modification lessens impact of crisis

One of President Obama's biggest initiatives-the $75 billion Making Home Affordable Program-targets loan modification, and that has a direct correlation to the real estate crisis. His administration believes that about four million homeowners can be saved from foreclosure through the Making Home Affordable loan modification plan. The apparent weakness in the Making Home Affordable approach is that participation is voluntary for banks and other mortgage lenders. Many banks are reluctant to offer a mortgage refinance that cuts into their profit margins. They also run the risk of being sued by third party investors if they agree to loan modification plans that cost investors money. But for any loan modification program to be effective in stimulating the economic recovery, somebody has to incur substantial losses. The Bush administration tried a hands-off approach that called for voluntary measures, and failed miserably. It's too soon to tell whether the new president's Making Home Affordable program will succeed, but without stronger incentives for banks, it may turn out to be another paper tiger.

Mortgage refinance preferable choice

President Obama has taken a hard line regarding overall regulation of the financial industry, and that has inspired many lenders to be more proactive and cooperative. He has visibly cracked down on predatory credit card practices, for example, and the mortgage industry has taken note of that. Lenders would much rather offer voluntary compliance than face mandatory rules and involuntary oversight. As a result, banks that would otherwise be reluctant to do so are agreeing to loan modification and mortgage refinance strategies to help homeowners avoid foreclosure. The policing of the financial industry, in other words, creates a special kind of motivation among bankers, and Obama has a team of tough cops and watchdogs working under him.

Affordable mortgage rates

Mortgage interest rates are also the lowest that they've been in nearly 40 years, thanks in part to a Treasury Department initiative to buy about $1.75 trillion in mortgage-backed securities. That makes it easier to do a mortgage refinance and save money or avoid foreclosure, so affordable mortgage rates are a plus for Obama's report card.

But the long-range implications of costly taxpayer-funded interventions remain to be seen. If government investments lead to economic recovery, Obama will get the credit. But a prolonged economic crisis will undermine his performance score. The fact is that 100 days isn't enough time to grade a president, or to hope for legitimate signs of an economic recovery.