Stock whiplash follows mortgage news

A bad day for the Dow turned sunny -- just about the time Reuters reported about a new White House plan to help homeowners.

By Andrew Leonard

Published February 12, 2009 10:41PM (EST)

Why did stocks abruptly reverse a vicious plummet Thursday afternoon and surge upward in the last hour of trading? Yes, yes, my readers have been warning me lately not to "anthropomorphize" the stock market, but there is something titillating in the news, reported by the Wall Street Journal, that the "furious rally" came after "Reuters reported that the Obama administration is working out a plan to subsidize mortgage payments for homeowners with problem loans who have gone through a standardized reappraisal and affordability test."

The Reuters story is here. Details are sketchy and on-record sources in short supply, but the intriguing aspect to the plan is that, theoretically, it is aimed at getting help to homeowners before they go bust on their mortgages. This is a bit more proactive than the tactics we became accustomed to from the last administration.

In a major break from existing aid programs, the plan under consideration would seek to help homeowners before they fall into arrears on their loans. Current programs only assist borrowers that are already delinquent ...

Under the plan being mulled, homeowners would have to make a case of hardship to qualify for new loan terms, according to the sources.

The lack of any greater detail makes it difficult to dig into the plan, but understanding Wall Street's sudden attack of jubilation is easy. Putting some kind of floor under the housing market is a critical step, not just attempting to put the brakes on the recession, but also in getting a handle on the deep problems faced by financial institutions buried up to their neck in derivative financial instruments tied to the housing market. All those busted mortgages and foreclosures keep eating away at the value of the securities into which those mortgages have been bundled and sliced and diced. As long as the housing bust continues to get worse, the potential losses faced by the owners of those securities will continue to grow.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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