Obama Mortgage Relief Plan

President Obama has announced a plan to keep 4 million homeowners from foreclosure on their homes for not making the payments. He has allocated $75 billion for this plan.

Let’s do the math. 4 million homes with an average mortgage of $200,000 is $800 billion. If the average interest rate is 7%, the total monthly payment on those 4 million homes is about $5 billion. If we ignore the cost to administer the program, the $75 billion might be used to cover their loan payments for about two years. Wouldn’t that be nice? But it would be a temporary stopgap.

However, another part of his plan is for each of them to go to court to get their loans revalued downward, meaning that the principal of their loans would be reduced. For round numbers, let’s assume that each judge reduce their principal by $100,000. But wait, 4 million home loans reduced by $100,000 each, adds up to $400 billion. What does it mean to have the principal of the loan reduced by a judge? When the loan was set up, the lending bank gave the loan amount to the previous owner. It is gone. When the judge says the principal is $100,000 less, the bank will be forced to write it off as a loss. The banking industry cannot afford to write off $400 billion in bad debt, not now. Therefore, Congress will have to bail out the banking industry again to the tune of $400 billion, as a result of Obama’s $75 billion relief plan.