February 17, 2009

Carrots, sticks and money for homeowners

U.S. President Barack Obama's plan to help homeowners may include subsidies to lower mortgage payments matched with a bank's contribution, sources said.

The plan, expected to be announced Wednesday in Phoenix, may include an effort to change laws to allow bankruptcy judges more leverage in restructuring mortgages, The New York Times reported Tuesday.

It turns out you can't modify that mortgage if you're in bankruptcy. Now that makes no sense, Obama said in Elkhart, Ind., last week.

But, banks claim few would write mortgages knowing a judge could unilaterally change the terms later on, the newspaper said.

U.S. Sen. Charles Schumer, D-N.Y., said the plan is going to have both carrots and sticks.

The number of loans in foreclosure doubled from 2006 to 2008, peaking at 2.3 million last year. Administration officials have said the White House is prepared to commit $50 billion to slow the rising foreclosure problem.

However, government intervention could anger homeowners who wonder why those -- banks and borrowers -- who made bad decisions are the ones receiving help.

This puts the whole moral-hazard issue front and center, Howard Glaser, a former Clinton administration official who is now a financial consultant, told the Times.