Obama's $75 Billion Initiative To Help At Most One Third Of Troubled Homeowners

As was discussed previously, the impact of recent $75 billion Homeownership Stability Initiative will most definitely have a very limited impact on improving delinquency and foreclosure statistics. Where before we focused on some theoretical musings, not we present a a more concrete example of why the HSI may impact at most one third of at risk homeowners.

In the current framing of the HSI's $75 billion in proceeds, $44 billion would go toward incentives, leaving $31 billion to fund interest rate reductions. The goal of reducing the targeted borrower universe to a 31% Debt To Income ratio is woefully underfunded based on the $31 billion residual balance. Assuming an average mortgage balance of $200,000 suggests total mortgage debt outstanding impacted would be $800 Billion, which is about a third of the $2 trillion of estimated "at risk" mortgages. $80 billion dedicated to interest rate reduction is the minimum amount needed for the plan to even have a theoretical chance of succeeding.

The figure below presents why the cost of incentives for 4 million borrowers with a loan mod plan under the Homeowner Affordability and Stability Pact would cost $44 billion over 5 years. As in the time period many of these borrowers will become delinquent the final cost will likely end up being lower.

The next analysis presents the case of a $26 billion cost of loan modifications over five years. Additionally, the analysis is based on the government's subsidizing of half the cost of reducing DTI from 38% to 31%, but there is no accounting for where the incremental cash would come to lower the 45% DTI to 38% in the first place, which is where the 4 million borrowers are currently from a DTI standpoint.

Cumulatively, assuming 4 million borrowers on the program and an average $200,000 mortgage balance, the program would cover $800 billion in mortgages, or a third of $2 trillion in at risk mortgages.