Who are these 'responsible' homeowners?

Kathleen Pender, business columnist for the San Francisco Chronicle poses for a portrait on Tuesday Sept. 30, 2008 in San Francisco Calf. Kathleen Pender, business columnist for the San Francisco Chronicle poses for a portrait on Tuesday Sept. 30, 2008 in San Francisco Calf. Photo: Mike Kepka, The Chronicle Photo: Mike Kepka, The Chronicle Image 1 of / 1 Caption Close Who are these 'responsible' homeowners? 1 / 1 Back to Gallery

President Obama's housing plan is designed to save "responsible" homeowners from foreclosure by having taxpayers subsidize their mortgage payments.

The problem is, how do you define "responsible?"

In his speech, Obama said his plan "will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford."

It should be fairly easy to identify speculators who bought homes to rent or flip. But how do you prove someone bought a home they knew they couldn't afford?

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I've spoken with many people who can't pay their mortgages and are desperate for help. All bought homes they thought they could afford and in many cases really could afford.

Most got into trouble by refinancing their homes - often more than once - and extracting every possible dollar of equity. The money went toward granite countertops, stainless steel appliances, credit cards, student loans, vacations, weddings, cars, etc. Then came a job loss or a divorce or the roommate moved out, and suddenly they couldn't make the payment. They tried to sell or refinance but couldn't because the home's value had dropped below the loan balance.

Responsible or reckless? Who's to say?

Obama announced two new plans for "responsible" homeowners who want to reduce their mortgage payments. Neither excludes people who cashed out their equity.

Both are open only to people whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac, which essentially have become arms of the government.

The first will help homeowners who want to refinance at a lower rate but can't because they owe more than 80 percent of the home's current value. The plan will let them refinance through Fannie or Freddie as long as the loan does not exceed 105 percent of the market value. To qualify, homeowners must be current on their mortgage payments.

Obama said this program's cost to taxpayers "would be roughly zero. While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures."

The second plan posses a far greater cost to taxpayers. It will use $75 billion from the Troubled Asset Relief Program (renamed the Financial Stability Plan) to modify loans for "households at risk of imminent default despite being current on their mortgage payments." I'm not sure what that means.

Some of the money will go to loan servicers who get customers in modification plans. Some will go directly to homeowners in the form of mortgage subsidies and rewards for continued payment. Borrowers who stay current can get a bonus of up to $1,000 a year for five years.

Who qualifies for this windfall? The details are still being worked out.

Ken Rosen, chairman of the Fisher Center for Real Estate at UC Berkeley, says it should exclude people who lied on their loan applications.

And in assessing the borrower's ability to pay, the government should look at assets, not just income - the same way it does when people apply for welfare or college aid.

Past mortgage-modification plans have not had an asset test. A homeowner could have a Lexus in the driveway and a half-million in retirement accounts and still qualify if his income was low enough.

The White House says all homeowners will benefit from the plan because without it, the average home price would fall an additional $6,000.

How does that benefit people who pay taxes but don't own a home? And how about all those renters who refused to buy an overpriced home with an exploding loan?

The percentage of households that could afford an entry-level home in California soared to 59 percent in the fourth quarter of 2008 compared with 33 percent the same period a year ago, the California Association of Realtors said Wednesday. In the Bay Area, the index jumped to 47 percent from 23 percent, thanks largely to a drop in home prices.

Although the stimulus plan provides a tax credit for first-time home buyers, some might like to see prices come down even more.