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Rescue packages: Obama stalls for time

If you are going to throw money at a problem, throw it at the right problem.

The Homeowner Affordability and Stability Plan announced by president Obama’s administration in mid-February is yet another example in this crisis of well-meaning legislation that largely misses the point.

The good thing about it is that it is at least attempting to tackle the root of the problem: mortgages. The bad thing about it is that it is tackling the wrong ones. The $275 billion plan is two pronged: first, it will allow mortgages held or securitized by Freddie Mac and Fannie Mae that do not account for more than 105% of the current value of the property to refinance. Second, an interest modification programme will enable interest rates on adjustable rate mortgages (alt-A option ARMs) to borrowers at risk of foreclosure to be reduced for the next five years.

The first part of the plan will enable lots of borrowers to refinance – but just not those borrowers that really need to. Refinancing will be available for between 4 million and 5 million responsible homeowners with conforming loans guaranteed by the GSEs on which they made a 20% down payment and are current on their payments. The refinancing option is not available for the $2 trillion of deals that have been written in the private-label MBS market and are the real root of the problem.

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