This is Housing Rescue No. 4 or 5, but hey, who’s counting? Its predecessors, with catchy names like “Hope Now” and “FHA Secure,” didn’t do much to halt the relentless slide in sales and prices or the soaring rate of delinquencies and foreclosures.

“They were complete duds,” says Andy Laperriere, a managing director at the ISI Group in Washington.

For example, the Federal Housing Administration’s FHASecure program, unveiled with great fanfare in August 2007, was supposed to help 240,000 families avoid foreclosure. “It made 4,000 loans,” Laperriere says, citing a report from the Congressional Budget Office.

“HOPE for Homeowners” was introduced last October with the aim of assisting 400,000 at-risk borrowers. The program has completed 25 loans to date.

One doesn’t have to be a skeptic to challenge the Obama administration’s claim that “Making Home Affordable” will help 9 million homeowners achieve that goal, according to the Treasury’s fact sheet.

“It’ll make a difference, but the government is grossly overstating the number of loans it will make a difference for,” says Michael Carliner, an independent economist in Potomac, Maryland., formerly with the National Association of Home Builders.

Rosie Scenario

An estimated 4 to 5 million homeowners with mortgages guaranteed by Fannie Mae or Freddie Mac will be able to refinance into a 30-year fixed-rate loan at a lower interest rate, as long as they’re current on their payments and the loan-to-value ratio doesn’t exceed 105 percent.

A second group of 3 to 4 million homeowners at risk of losing their homes will qualify for a subsidized mortgage with a monthly payment no greater than 31 percent of gross monthly income. The low rate will be in effect for five years.

Sounds like a good deal for homeowners, right? The government makes it even sweeter.

Adopting the mantra for executive compensation, the government is offering borrowers a “Pay-for-Performance Success Payment,” a $1,000 bonus for five years that will go toward reducing the principal amount on the mortgage. In other words, the government is paying the borrower to do what he was already obligated to do under the mortgage contract.

“People should be outraged at pay for performance,” says Thomas Lawler, founder of Lawler Economic and Housing Consultants in Leesburg, Virginia. “It is horrific public policy.”

No-Fault Legislation

Servicers get a $500 bribe for doing their job, along with a get-out-of-jail-free card. Last week, the House of Representatives passed legislation to remove the legal impediment to full-scale loan modification.

There may be an iota of logic behind the putrid public policy, according to Carliner.

“The idea is that there’s a negative externality if someone defaults, so give them an added incentive” to modify the mortgage, he says.

“Negative externality” is an economic term used to describe situations where one individual’s actions have a negative effect on others. If the bank forecloses on my house, the value of my neighbor’s house goes down.

There may be an overriding principle -- people respond to incentives -- that “encourages people to get into trouble so they can qualify,” Carliner says.

Homeowners need to show financial “hardship” to qualify, a filter that should be easy to pass through, Lawler says.

What About Renters?

What has him really exercised is the exclusion of renters from the pool of those qualifying for government assistance. Renters are struggling even more than homeowners, according to the Federal Reserve’s financial obligation ratio, a measure of debt payments to disposable personal income.

Lawler’s analysis of employment statistics leads him to the same conclusion. The jump in the unemployment rates for young workers, blacks and Hispanics -- all groups that are less likely to own a home -- over the past year suggests renters are getting hit harder by the recession.

Just think about it: If you are a homeowner who overreached on your mortgage and are experiencing financial hardship, the government has a deal for you.

If you are experiencing financial hardship but didn’t overextend to buy your house, take a number. Renters who can’t meet their monthly payment get the shaft as well.

“The renter gets nothing -- except his taxes go to helping the homeowner!” Lawler says.

Negatives Trump Positives

Of course, the repercussion from non-payment of rent is less than from default by an owner for at least one entity: the banks.

“Banks don’t take a direct hit if a tenant is evicted,” Lawler says. “The owner of the house can find another one, even if it’s at a lower rental rate.”

His objections notwithstanding, Lawler says the plan “could provide considerable relief to a significant number of homeowners at a sizeable cost to the government.”

ISI’s Laperriere says it may prevent as many as 1 million homes from going into foreclosure and joining the swelled inventory of unsold homes, far less than the government’s 3-4 million estimate but better than nothing.

The array of negatives dwarfs the small positive effect, he says.

“Home prices are too high relative to income, demand is collapsing, credit is tight, unemployment is rising and wealth is being destroyed,” Laperriere says. “The most it will do is change the trajectory at the margin of how fast home prices will fall.”

 SOURCE: Bloomberg