Housing Plan: Five Things Investors Need to Know

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."

© 2012 CNBC.com

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