The Obama administration this week will announce a plan with the goal of stemming mortgage foreclosures and trying to put a halt to falling real estate prices.  Obama plans to unveil his housing plan during a visit to Phoenix.   As part of his swing through western states, he is set to stop in Denver Tuesday, when he will sign the $787 billion economic-stimulus plan just passed by Congress.  Unfortunately, there are few details of the housing plan, but the buzz is the application of $50 billion to $100 billion to fund foreclosure prevention is expected.

Sounds fantastic in theory, but I’m not sure how practical the methodology.  One likely element of the plan would reduce Americans’ payments on troubled mortgages, possibly through a cut in the interest rate, the costs of which would be shared by the government and mortgage servicers.   I’m not sure how the mortgage servicers will fall in line without risking their own businesses.  The Government, at their determination, would make the reduction available to people who are at risk of defaulting.

A loan-modification program at government-backed Fannie Mae and Freddie Mac currently calls for holding monthly housing-related payments to 38% of pretax income. The new formula is likely to be as low as about 31%, according to some people.  In addition, the administration is expected to endorse a plan to allow judges to modify mortgages during bankruptcy proceedings in some circumstances, a move long opposed by the mortgage industry.  And frankly I think I see their point!  I have a hard time getting my head around the idea of the Government cherry picking through loans and re-writing them as IT sees fit.  I am all for helping out people in mortgage distress, but the Government has to work hand in hand with the lenders, not dictate to them.

The country’s three largest mortgage lenders are putting a temporary halt on foreclosures until all of this is sorted out.  Both Dems and Republicans are tossing the idea of nationalizing banks around.  Stay tuned.