Obama Gets Do-Over With Foreclosures by Extending Grace Period

The Obama administration finally got the wake-up call that banks are doing little to counter the housing crisis that is still destroying the American dream of home ownership.

The Federal Housing Administration today ordered banks to extend the mortgage-payment grace period for unemployed homeowners to 12 months for the FHA and Making Home Affordable Program guaranteed loans.

Housing and Urban Development Secretary Shaun Donovan said the FHA new policy was required since few lenders took it upon themselves to voluntarily offer 12-month forbearance periods to unemployed homeowners. Banks have provided a four-month grace period, which amounts to spit in a bucket in a lousy economy like this one.

"We have been disappointed that more services haven’t gone beyond the four months. The reason we took this step now is that in every case that they are doing this, that they go to that 12 months," Donovan said.

"Part of why we are doing this, is to set a single standard, is to try to push the broader market to extend their unemployment programs and forbearance programs," Donovan said.

Obama, who is finally beginning to take a hard look in the rear-view mirror, admitted yesterday during his Twitter Town Hall that his administration’s policies aimed at countering the housing crisis were "not enough."

"The continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected," Obama said.

"And so we’re going back to the drawing board," he added.

Some observers believe Obama is taking another crack at easing the housing crunch as part of a re-election strategy, while others think he may have finally realized that he has given Wall Street and the banks a big wet kiss, even as their greed has turned the American Dream into a nightmare.

So What Does the Tanking Housing Market Mean?

Housing prices have fallen to 2002 levels, but the financial markets responded with an end of the month rally today that ignored the bad news.

Standard & Poor's Case-Shiller Index reported today home price index has declined for eight straight month, dropping by 4.2% the first quarter of 2011.

The Dow Jones average went in the other direction, climbing 128.06 points after a rough month.

Felix Salmon at Reuters takes a shot at deciphering the disconnect between the housing and stock markets.

"I don’t have any good answers here, except to say that if housing is getting cheaper, in many ways that’s a good thing. Sure, it’s bad for banks, and it’s unpleasant for anybody who bought a house as an investment," Salmon writes.

"But in general, the less money we Americans spend on housing every month, the more money we have to spend on more productive sectors of the economy, and the higher our disposable incomes," he concludes.

The question is how long can the financial markets climb should banks feel the heat from the housing decline?

"As snake-bitten banks have discovered in recent years, the heath of the housing market is closely correlated to the health of banks," writes Wall Street Journal blogger Shira Ovide.

One reason the market shrugged off the data may simply be that we have known for months that a double-dip in the housing market was coming.

So this is going to be a wait-and-see moment, unless of course you are the American home owner who purchased property in the past decade thinking it would be a good investment. Those folks already know what it means for them.