The Housing Stimulus

I must admit upfront that I have not read President Obama's housing stimulus in great detail. But based on what I read, I think it is a good start. That's right. It is a good START.

According to a commentator from The Economist on NPR, only 12% of the mortgates are sub-prime (sub-prime is defined generally as someone who has a below 600 credit score though there may also be other criteria), but about 50% of foreclosures are sub-prime. Of the 2 million foreclosures last year, approximately 45% were in four states - Nevada, Florida, Arizona and California (not necessarily in that order).

Back to the President's housing stimulus package.
It will begin the process of cleaning out some of these toxic assets. But there are quite a few questions (or as they say the devil is in the details).

1. 1. It does not apply to non-Fannie/Freddie mortgages. How many such mortgages are there and what per cent of these are in foreclosure today and may go into foreclosure in the future.
2. 2. It does not apply to people who bought homes that they obviously could not afford. What are the criteria to determine this affordability?
3. 3. The mortgage payment can not exceed 31% of gross income. What happens if the person is unemployed? 31% of zero is zero. And in case the person is employed, what happens to the difference? Is it being added to the mortgage by extending the term of the loan?

The housing stimulus is good because for one thing, it streamlines the guidelines for renegotiating the mortgage across the land for all lenders who have taken money from the Fed.

I assume that this package will also apply to future to-be toxic mortgages. Currently, the cost of this package is put at around $275 billion but what if GM or Chrysler files for bankruptcy?

The problem with this current recession is that there is no visibility of the bottom yet. May be it would be a good exercise for the financial institutions to look at their books and actually work to determine a reliable estimate of the extent of their assets which are toxic. May be they know this and are reluctant to admit it. Or may be they are clueless. I would bet on the latter, because the process is still ongoing. But for loans bundled as CDOs or MBCSs it is possible (albeit mathematically) to estimate the percentage that would become toxic in the future. This is not a one-day or one-week task, but is doable. Because until we identify the extent of the problem we can not get a handle on resolving it.