The Obama Mortgage Relief Plan was introduced last week. Further details were released today. The plan is designed to:
1. Stabilize the decline in housing prices - according to Mr. Obama, modifications in these mortgages will help moderate the decline in these prices.
2. Stem the flow of foreclosures - the Obama administration states that the plan will help up to 9 million families who are currently in foreclosure or will soon be facing foreclosure.
Will the Obama Mortgage Relief Plan Stop the Decline in Housing Prices?
Let's take a look at the first objective. In my article "Soaring Unemployment Rates - Do You Have a Backup Plan?," I said that housing prices will continue to fall, as much as 20% on the average. As a result, we would see soaring unemployment rates and unemployment remain at very high levels for many months.
Because of the soaring unemployment rates, I recommended that all people have a backup plan, a Plan B, in case their family income was to decline. I suggested that one should strongly consider an internet network marketing business as their backup plan. I pointed out that people could get excellent internet network marketing training at a very reasonable cost and continue to work their regular job.
The 20% decline in home prices is based upon the ratio of the median price of a house in the United States divided by the median income a family earns in our country. When you compare this ratio with the historical ratio that has existed for many decades, it suggests that home prices are still over-valued by as much as 20%.
I stick by those numbers despite the Obama Mortgage Relief Plan. As the unemployment rate and initial job claim numbers continue to rise, there is nothing in the plan that will change the long term trend of falling housing prices. Housing prices are still over-valued.
To understand the reasoning behind these statements, please read, Soaring Unemployment Rates - Do You Have a Backup Plan?
Let me say this. Some areas of the country have been significantly affected by the housing and credit bubble. Their housing prices will be impacted the most as prices continue to decline. Other areas have not experienced major appreciation in housing prices during the bubble years (2004-2007) and will probably see little if any significant decline.
The most likely scenario is that the Obama Mortgage Relief Plan will reduce or, at least, delay foreclosures in the short term. The plan will probably prolong the agony of falling housing prices over a longer period of time. I don't think that is what most people are expecting.
The plan may slow down the sharp decline in housing prices. However, in the long term, home prices will fall to their true market value. Only then will the housing markets reach a bottom and prices stabilize. The economy will continue to struggle.
We will continue to see soaring unemployment rates and high levels of unemployment for a long time. This is despite the optimistic comments made by Fed Chairman Ben Bernanke earlier this week.
Will the Plan Help as Many as 9 Million Home Owners?
The second objective of the Obama Mortgage Relief Plan is to help up to 9 million families either restructure their loans or refinance them.
I feel that those projections are far too optimistic.
I say that for two reasons. First of all, a high percentage of homes sold during the bubble years were purchased as second homes or as investment property. According to the National Association of Realtors, 40% of existing homes sold during the peak year of the bubble (2005) were purchased by those two groups. Of course, those two groups are excluded from any relief under the plan.
Here is the second reason why I feel that the projections of the Obama Mortgage Relief Plan are too optimistic. Certain areas of the country have been hit the hardest by the bust in the real estate bubble. In those areas, home prices have fallen so much that many of those home owners will not qualify for the 105% loan to value maximum refinance standard required in Obama's plan.
Like every other mortgage modification before, some lenders and some borrowers will avoid foreclosure. Many will not be helped. The plan is not a magic bullet - not a cure all.
Soaring unemployment rates and high unemployment levels will be with us for a long time. Having a strong backup plan and obtaining internet network marketing training, while holding onto your job, is a sensible approach in these difficult economic times.
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