Investors hoping the government bailout will rescue the housing industry are making a risky bet, judging by analysts' reaction to the plan.
While the plan that President Obama unveiled Wednesday certainly will help many homeowners at risk of foreclosure, the chances that the rescue will trigger a housing recovery that in turn will boost stocks are dicey.
In fact, analysts see the effects on the market as minimal.
"When you add it all up, it's another one of those plans that has some good elements and some bad, but it isn't a cure-all," says Mike Larson, an analyst with Weiss Research in West Palm Beach. "It will avoid foreclosures for some borrowers, but it's not going to stem the tide in the housing market."
Reaction to the plan can be broken into five observations:
1. It Might Not Work
While the Obama administration pins its hopes for a housing turnaround on a plan that centers on making mortgages more affordable through lower interest rates and refinancing, some analysts wonder why the plan doesn't take a more direct approach toward principal reduction.
Even then, there's the larger question of whether those who will be paying lower interest rates that will translate into reduced mortgage payments will still be able to afford their homes. Past attempts at similar programs have a dubious legacy.
"Some will avoid foreclosure, but the historical experience with modification proposals isn't good," says Mike Widner, equity analyst at Stifel Nicolaus in Baltimore.
That's because the plan provides only limited help for borrowers and will not help those with a significant discrepancy between their mortgage debt and the value of their homes.
Moreover, the plan does nothing to aid those with so-called jumbo loans—in excess of $729,750—who have contributed heavily to the foreclosure crisis in the worst-hit markets such as Arizona, California and Florida.
"The expanded refi ability part of the plan won't have as much impact into the hardest-hit part of the market," Larson says. "On the one hand it may be going too far; on the other hand it may not be going far enough."
2. Banks Could Get Only Marginal Help
The consensus on a recovery is that banks will have to lead the way.
But one part of the plan calls for judges to be able to step in and force banks to lower payments. Analysts say that will weaken bank balance sheets by reducing the value of the mortgage-backed assets and thus put pressure on share prices.
Indeed, bank shares have been getting hammered since the plan's release.
"For the most part it seems like you're left with all the same credit risks and lower-yielding assets," Widner says. "It will certainly result in fewer defaults. The question is, does the amount you save in credit costs outweigh the amount you give up in interest spread."
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The counter argument is that by preventing foreclosures, it will actually increase the asset values, thus helping balance sheets. Opponents of the plan wonder if the value recovered by halted foreclosures will exceed the value lost via asset reduction.
"You're going to need to stop a whole lot of foreclosures to make up for what you're taking on the chin," Widner says.
The Bright Side--and the Dark Side
3. The Bright Side: Psychological Benefits
Among the all-time favorite market chestnuts is the one about rising tides lifting all boats.
Those pinning their recovery hopes on the housing plan are probably reciting the mantra in their sleep, hoping that government intervention will be the necessary pill to revive the moribund markets.
"What I believe it will do more than anything is stimulate sentiment, and the emotions of the investor are at a very fragile and critical juncture right now," says Gary Hager, CEO at Integrated Wealth Management. "The more (the government is) able to do the more confident people will get. The spillover of that will be more spending."
Yet even as Hager calls himself "cautiously optimistic" that the plan will succeed, he says it is unlikely to be the game-changer that Wall Street is seeking.
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"The mortgage plan is no rising tide—it's more like a couple little wavelets riding through," he says. "Most people would probably agree that we're going to need another one in the third quarter. This is not enough stimulus, quite frankly, to get this machine turned over."
4. It Could Make Things Worse
The worst-case scenario is that the plan to prop up troubled mortgages will not address the need for housing prices to fall to sustainable levels.
In the meantime, mortgages guaranteed by Fannie Mae and Freddie Mac—and in turn public funds—could be in no better shape than they were before the government mortgage program kicked in as the housing market and the economy continue to languish.
"The possibility [that] is Fannie and Freddie are going to kick the can down the road," Larson says. "They're making big bets with taxpayer money that the prices are going to turn around, the economy's going to rebound and whoever gets into one of these refis with the lower rate will stick around.
"Neither you nor I nor anyone knows if that will be the case," he says.
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In the meantime, foreclosures will continue to pile up for those not within the jumbo limits underwritten by Freddie and Fannie as well as for those who cannot come within the prescribed debt-to-income ratio under the Obama plan.
"I empathize with the borrower .... but I think we're making a bad situation worse," Widner says. "Not that foreclosure is a great option for the banks, but it seems we may end up foreclosing on that borrower anyway. The general practice is, don't postpone the inevitable."
5. Investors Need to Remain Cautious
With only marginal help coming, investment advisors aren't advocating using the mortgage plan as a springboard to get back in the market.
"It's hard for me to find many financials that I like at this point, or too many individual stocks I like," Widner says.
Instead, Widner says he likes agency real estate investment trusts, or REITs, that invest in residential mortgages guaranteed by government-sponsored entities including Fannie and Freddie.
Hager says the emotional impact from the mortgage proposal could spark modest increases in consumer spending, while Larson remains bearish on the market, recommending that clients either stay on the sidelines or use exchange-traded funds that capitalize on movements lower in the markets.
"I wouldn't buy into a lot of these government-fueled rallies," Larson says. "The picture being painted is not a good one, and that's why caution is probably the best bet for most investors."