I’m not sure Ms. Bair’s plan helps with bubble areas like SD.

For homes that are already “upside down” by 20% or more (which is the typical case for most of the distressed homes in SD), why would the borrowers agree to the restructured loans. Even if they get to pay down 20% of the principal interest-free in the next five years, they still end up with a loan as big as what their house is worth now at the end — except by that time probably their house will have lost more value, and the accumulating interest (assuming 5.88%) will have added 33% debt to the remaining 80% = 106.4% of present debt.

In other words, having paid off their debt to the government steadily over the first 5 years, they will end up with a debt 6.4% more than what is owed now. Given that house prices are likely to go down another 15-20%, they will still be in the same situation then as now, and they will have thrown away all that money they will pay back the government’s 20% loan.

For people who are about to walk away due to being upside down several 100K’s, this plan doesn’t help them at all.

She did say that it’s not meant to help people who are already seriously distressed, which the FHA proposal is supposed to address.

I think a proposal like this could be a good idea if the market has already over-corrected and is in an unjustified downward-spiral. It only works by assuming that house prices will stabilize or even start rising if only this vicious cycle of defaults & foreclosures could be stopped (and that’s not a bad idea, since the economic damage caused by ex-owner vandalism on foreclosures, as well as the expensive legal costs of undergoing foreclosures both cause inefficiencies to the economy). But the market is far from over-correcting, and the sheer volume of homes already foreclosed will continue to pressure the market downward.

Implementing a plan like this now cannot really help a still “bubbly” market like SD, it will only cause inflation and devalue responsible people’s savings by selling an extra $50 billions in treasury debt, which is how they’re proposing to fund this HOP plan.