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Monday, November 03, 2008

WSJ: Foreclosure Prevention Program Drags

by Calculated Risk on 11/03/2008 10:31:00 PM

From the WSJ: Homeowners Wait as Relief Plan Drags

The FDIC has been developing a proposal, which some estimate could help between two and three million homeowners, designed to encourage banks to rework troubled loans by providing a partial federal guarantee for losses on modified mortgages that meet specific criteria ... The plan would use between $40 billion and $50 billion from the government's $700 billion financial-market rescue fund ... Several officials said the plan is strongly opposed by the White House, though officials there deny killing the idea.
It sounded like a plan would be announced last week, but it appears there is strong disagreement on what the plan should look like.

This is a key point:
"Even an ambitious program of mortgage modifications will not prevent a further decline in house prices," said Douglas Elmendorf, a senior fellow at the Brookings Institution and a former Clinton economic adviser. "It might prevent an overshooting of house prices on the downside. But houses still look overvalued relative to people's rents or incomes, and it's going to be very difficult to sustain house prices at their current level."
Any attempt to keep house prices artificially high will just postpone the inevitable and delay the eventual recovery.