Housing Plan: Five Things Investors Need to Know

Investors hoping the government bailout will rescue the housing industry are making a risky bet, judging by analysts' reaction to the plan.

AP

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.

CONTINUED : The Bright Side--and the Dark Side

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