The new White House plan to help people with underwater mortgages is already a success or a failure, according to comments from the media and some housing experts. They cannot know. The critical factor that will determine whether the program works is if it becomes a hostage to the federal government’s bureaucracy.

The Federal Housing Finance Agency says the new plan to refinance underwater mortgages at lower interest rates will help 800,000 to one million homeowners. That would be substantially more than the Home Affordable Refinance Program that preceded it. There is no question that homeowners with houses worth less than their mortgages will flock to get new loans. The program will not suffer from lack of demand.

CNNMoney reported: “The program is being touted as a way to help stabilize the housing market and stimulate the economy. But without addressing distressed homeowners and helping to clear the foreclosure glut, the effects will likely be limited, experts said.” There is no way to know if that is true. It will depend on how rapidly the plan can be implemented and how many homeowners receive assistance. Underwater mortgage holders are more likely than those with positive equity in their houses to default and begin the foreclosure process. The foreclosure “glut” is affected as much by houses that move into inventory as by foreclosed homes that are sold, or bulldozed, and moved out.

The problem with the Home Affordable Refinance Program was that it took several months after its creation to really begin its work. More than two years after being established, paperwork and resistance from banks still make the program ineffective. The Obama administration ought to learn something from that. If it does not, the new refinancing plan will fail. If it is a failure, homeowners, banks and real estate agents will give up hope that the federal government can help resolve the housing crisis.

New York Federal Reserve President William Dudley recently said, “If prospective homeowners no longer fear that prices could decline further they will be more willing to enter the market to take advantage of reduced prices and lower financing costs, and existing homeowners will feel more confident about increasing their spending. A vicious cycle could be replaced by a virtuous one, in which stabilization in house prices supports spending, growth and jobs.” Dudley understands that programs like this new one are the only way the psychology of the housing market will change.

It is very hard to take new programs and push them through miles of red tape and resistance. If the new underwater refinance program does not work, it will be because it gets bogged down in government processes that prevent ideas from becoming effective programs.

Douglas A. McIntyre

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