WKOW 27: Madison, WI Breaking News, Weather and SportsUW economist blasts Obama mortgage plan

UW economist blasts Obama mortgage plan

ATLANTA (WKOW) -- A UW-Madison business school faculty member told 27 News President Obama's $275 billion mortgage plan to try to stem the tide of home foreclosures neglected the next wave of distressed borrowers.

"It is an unmitigated disaster,"  business school real estate division assistant professor Morris Davis told 27 News, as Davis attended a professional conference in Atlanta.

"It does absolutely nothing for the recently unemployed,"  Davis said. 

Obama's plan focuses on using subsidies to encourage banks to lower the amount of a borrower's monthly income dedicated to a mortgage payment.   The plan also calls for borrowers with so-called "underwater" mortgages to receive interest rates usually reserved for the most creditworthy borrowers.   A mortgage is considered underwater when the value of the home is less than what is owed on the mortgage.

Davis said it appears the initial, national wave of distressed borrowers with sub-prime mortgages is already in foreclosure.   Davis told 27 News homeowners experiencing the "income shock" of a job loss are in most need of help, and more attractive interest rates will not be enough to address their situation.

"Assistance like unemployment insurance is needed, where a homeowner experiencing income shock is loaned money to cover several months of mortgage payments, with a repayment schedule over a couple of years.   If government is going to act, it needs help these people in crisis."

Before his position at UW-Madison, Davis was an economist with the Federal Reserve Board between 2002-2006.

On main streets in Dane County, some of Davis' concerns were echoed.

DMB Community Bank president Brad Schroeder of DeForest said the plan's call for lenders to agree to reduce the monthly payments for distressed homeowners to 38% of a borrower's income is meaningless in a growing number of accounts.  

"The reality is, if both parties (homeowners) don't have jobs, 38 % of nothing, is nothing."

But Schroeder said the plan's inclusion of a subsidy for participating lenders could encourage banks to reduce the income-to-payment ratio on mortgages, and said attractive interest rates for distressed borrowers, regardless of the amount of equity in homes, was "very powerful."

Davis said the plan is destined to fail unless it is revised to account for homeowners with the temporary inability to pay on mortgages due to job loss.   "Only that (revised plan) will work." 

Obama administration officials estimated the president's plan would help up to nine million homeowners.

For comment and news tips, contact reporter Tony Galli at tgalli@wkowtv.com