Obama details six principles for modernizing the financial regulatory system:
- Provide the Federal Reserve with basic supervisory authority over any financial institution to which it may make credit available as a lender of last resort.
- Capital, liquidity and disclosure requirements should be developed and strengthened for all financial institutions.
- End our balkanized framework of overlapping and competing regulatory agencies.
- Regulate financial institutions for what they do, rather than who they are.
- Crack down on trading activity that crosses the line to market manipulation.
- Identify systemic risks to the financial system, no matter where they arise.
Obama also has a plan for Protecting Homeownership & Cracking Down On Mortgage Fraud (PDF). It too is detailed and has some good ideas that could be effective for dealing with the home mortgage crisis at hand. However, there are a couple of questionable components to this plan. He bases his plan to help homeowners facing foreclosure on the claim that:
One of the biggest problems associated with the crisis in the housing market is the decline in house values, which is putting people's mortgages underwater, meaning that their mortgage is worth more than their houses. Many people who find themselves in this situation simply walk away, worsening the foreclosure problem.There is a basic weakness to this precept. The reason homeowners are facing foreclosure is predominantly because they bought homes they could not really afford using the creative financing instruments that were the hallmark of the real estate bubble. Then when their APR increases, they simply can't afford the new monthly installments, regardless of whether they have equity or not.
It doesn't make sense that homeowners would go into foreclosure simply because their mortgage is "underwater." They would still need a place to live even after foreclosure. They also understand the importance of maintaining a strong credit rating. If they could afford the payments, homeowners would keep their homes even were their valuations less than their outstanding principal. Unfortunately, some of the tactics Obama proposes would not be effective since they're based on the invalid assumption that people face foreclosures because they have negative equity.
Obama also proposes refinancing ARMs with fixed-rate mortgages as a solution to those facing foreclosure. But the reason people got ARMs in the first place is because they couldn't afford the monthly payments on a fixed-rate mortgage with the inflated property valuations that existed at the peak of the housing bubble. The only way to afford a mortgage was using negative amortization loans, and the like, which started out with monthly payments at artificially low rates. These homeowners assumed when the rates got high enough that they could no longer afford the payments, they'd simply flip their house for a big gain that they could use on a down payment for a new home. But with negative equity, how could a financially distressed homeowner be expected to make the payments on a fixed-rate mortgage even if they could refinance?
In spite of these criticisms, Obama's economic plan is fairly good on the whole. There are many good ideas in it. With the next presidential administration still almost a year away, Obama has time to shore up the weaknesses in it before occupying the Oval Office. Besides, most of the unaffordable mortgages could already be foreclosed on by that time.