Paulson’s plan: Mostly harmless

December 18, 2007, 5:53 PM UTC

Treasury Secretary Henry Paulson was everywhere Monday, including on the Fox Business Network in a sharp interview with FBN’s Adam Shapiro, who pressed Paulson repeatedly on how effective his voluntary loan modification plan would be. Paulson stressed, and FBN — where I jawboned on air as soon as Paulson was done — streamed on screen, that his plan would affect 1.2 million homeowners.

I doubt that.

Joe Nocera, in his Saturday column in the New York Times, cited an altogether smaller number: 300,000. He cited numerous sources. Let me tell you something about Joe: If his sources think this plan will affect a fourth of the number Paulson thinks, I’m siding with Joe.

This number is important. The last time I saw an objective guesstimate was when the Wall Street Journal reported that of the 1.8 million homeowners with sub-prime re-sets, a third can’t be helped, a third won’t be helped because they can afford the re-set and the last third, or 600,000, would be eligible.

If the 300,000 number is correct, it feels totally irrelevant, which may be a good thing. This is problem that largely needs to work its way through the system, and if the Paulson plan provides a Band Aid, or a psychological balm, so be it.

My buddy Joe praises the plan for its compassion. And while of course I feel for anyone staring at a foreclosure, there’ve got to be other ways to help them. Many have compared the non-bailout bailout with aiding victims of Hurricane Katrina. But let’s be real. The people who took out loans they couldn’t afford aren’t victims. By and large, they acted stupidly. Their plight just isn’t analagous to living in the Lower Ninth Ward of New Orleans. Then again, if the plan won’t help that many, then perhaps it’s no big deal in either direction.

Lots of things have been gnawing at me about this plan, as I wrote here a couple weeks ago. Here’s one more: For those who will be the beneficiaries of a modification, say someone who gets a five-year extension of a teaser-rate ARM, is there any price being paid at all or are they just being a given a gift because they fit the criteria of the plan? If not, then those of us who took more conservative loans and paid a higher rate are the chumps. These people actually are getting away with something — they took a risk on a lower rate than if they hadn’t gone with a teaser and they’re going to get to keep it — which doesn’t make them feel like victims to me. (Katrina victims are getting a handout AFTER losing their homes.) If the lenders (and/or investors in the securitized mortgages) exacted a price, such as taking away some of their equity, or, if there is none, requiring that additional money be paid back, that would seem more fair. That would allow people to stay in their homes and reward the investor/lender for their willingness to modify beyond the reward of the not killing the economy with foreclosures. Likelihood of that happening? Not great.