President-elect Barack Obama is inheriting the worst housing recession in a generation, and the proposals he outlined on the campaign trail won't fix it, so there will be many tough decisions ahead.
His plan includes a 10 percent mortgage tax credit for homeowners who don't itemize their taxes, and a change in the bankruptcy law to allow judges to modify mortgages for financially distressed homeowners.
Obama's Web site also says he will "fight mortgage fraud and protect consumers against abusive lending practices," and standardize loan forms to make it easier for borrowers to understand the true costs.
But those proposals will have a minimal impact on the more than 4 million homeowners who are behind on their mortgages. They probably won't prop up home prices, which are down 18 percent from the peak. Nor will they bolster the confidence of consumers who have lost their jobs or are afraid they will. And Obama's plan won't make banks more willing to lend to consumers with less than perfect credit scores, or tiny down payments.
Reversing the real estate spiral will be an enormous feat.
"It's like a new captain of the Titanic after it has hit the iceberg," says Guy Cecala, publisher of Inside Mortgage Finance. "What can he do? Rearrange seating on the lifeboats?"
The most critical questions facing Obama now are: How to divvy up the remaining $450 billion from the financial industry bailout? Who will lead those efforts when Treasury Secretary Henry Paulson steps down next year? And what will the government ultimately do with mortgage finance companies Fannie Mae and Freddie Mac?
Nevertheless, with Obama measuring the drapes in the Oval Office, real estate professionals are looking closely at his original plans.
Allowing bankruptcy judges to modify mortgage payments is controversial, and Republicans repeatedly blocked such legislation, despite numerous Democratic efforts.
The mortgage industry and many on Wall Street say such a law would cause the mortgage market to seize up, because investors would stop buying mortgage-backed securities out of fear a judge could unilaterally change the terms of the deal.
Future borrowers, they say, would also have to pay higher interest rates or fees to offset the risk that a judge would rework a loan and lower the value of a mortgage-backed security.
"It could significantly destabilize the marketplace," says Steve O'Connor, senior vice president of government affairs at the Mortgage Bankers Association.
But Cecala counters that now might be the best time to change the law.
"Nobody is buying mortgage-backed securities anyway, so it can't hurt the market anymore than it has hurt itself," he says.
The second pillar of Obama's plan — the universal mortgage credit — could jump-start the market for first-time homebuyers. On his campaign web site, he said the 10 percent credit would provide an average of $500 a year to 10 million homeowners, many of whom earn less than $50,000 per year.
"It's great to promote homeownership, especially among first-time homebuyers if it's a true credit," says Marc Savitt, the president of the National Association of Mortgage Brokers.
Obama has not outlined how the tax credit would work and how it will be paid for.
The other proposals — increasing regulatory oversight and standardizing mortgage quotes so consumers can easily compare them — come too late to make a difference in this downturn. But they could keep a lid on abuses and overzealous lending so this historic bubble wouldn't be repeated.
Already, the Department of Housing and Urban Development is working on standardizing and simplifying mortgage forms, and momentum has been gaining for increased regulation.
"More regulatory oversight definitely would happen no matter who won" the presidential election, says Denise James, a director at Mortgage Asset Research Institute.
But, she adds, "With the kinds of legislation Obama is proposing, I definitely think it will increase transparency in the mortgage process."
With the changing of the guard in Washington still three months away, the intensity of the credit crisis and rescue plans on the table could alter significantly before inaugural day.
"We would have been far better off acting earlier," said Andrew Jakabovics of the Center for American Progress. "Just because we didn't act in time, that doesn't mean we shouldn't act now."