On February 18 the White House released an executive summary of the Homeowner Affordability and Stability Plan. Details to follow. The plan targets two groups: (1) Four to five million "responsible homeowners" who are current on their payments, have seen their property values fall, and who are now unable to refinance at lower mortgage rates. (2) Three to four million "at-risk" homeowners who are behind on their payments or are about to be, and who can’t sell their homes. The first group is the larger of the two, and it is the program for them that will be discussed here.

The executive summary provides this example: "Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.5% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan,that family could refinance to a rate near 5.16% -- reducing their annual payments by over $2,300."

We are invited to consider this situation, so let us do so. First, many of us might envy them. On the basis of their current loan balance we can determine that they purchased the home about 3 ½ years ago. Their property value has dropped 15%. Only 15%! That’s not bad when national indexes such as Case-Schiller and that of the National Association of Realtors have estimated the decrease in that time period to have been from 21% to 36%. NAR saw a drop of 15% last year alone. Clearly, our hypothetical family has purchased in one of the country’s more stable areas. Even with that good fortune, though, they should expect to see at least another 5% decrease in value before the bottom is reached, hopefully by next year. Then their home will be worth $209,950.

Their present loan is at 6.5% -- hardly high by historical standards – and their payment is $1,308 per month. They are able to make this payment. Were they to refinance to 5.16%, their payment would become $1,093 per month, a difference of slightly more than $200. The executive summary points out that they would save more than $2,300 per year. Actually, it is more than $2,400, but we might point out that they won’t see that savings until the second year. Assuming a very modest one-point fee, their loan origination costs will exceed $2,400.

Well, that was nice for them; but it’s fair to ask why the American taxpayer should be asked to subsidize this good deal. That is never really addressed in the White House paper. However, it is not hard to see the unspoken assumption. It is this: People whose loan is almost as much as (even worse, more than) the value of their house are liable to walk away from it, especially in a still-declining market, even if they can afford the payments. They don’t want to continue throwing "good money after bad."

But, if that is the concern, what has been accomplished in the example? Given the previous calculations, they will still have practically no equity. Even if (a big ‘if’) the market bottoms out next year, it is virtually certain to remain flat for at least the year after that. And when there finally is appreciation, what will it be? 3%? 5%? Does anyone think it will be more? It will probably take at least 5 years for our family’s home to get back to its original 2006 value.

If we and/or the government are worried that the homeowner will stop throwing good money after bad with a $1,300 payment, why should we be confident that the thinking will change with an $1,100 payment? It would make economic sense for the homeowner to stay in only if he can’t rent for an equivalent after-tax amount. In many markets, doing so is a viable option.

Actually, there is some reason to think the homeowner will stay. People aren’t purely rational economic animals. As Dan Airely has recently discussed in Predictably Irrational, things like ownership and a sense of responsibility are powerful forces in our decision making. They lead us to do things that aren’t rational from a pure dollar-and-cents point of view.

The White House may be counting on those forces to keep homeowners in their homes. If so, the question then becomes: "If ownership and responsibility are driving forces, why should we think, to use the White House example, that they are any less so with a $1,300 payment than with an $1,100 payment?" Unless there is a good overall answer to that question, all that the plan accomplishes, at great taxpayer expense, is to lower millions of house payments. That will be nice for those people; but not so great for the rest of us.

Published: March 6, 2009

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .