Obama Housing Plan Hopes to Help 9 Million Homeowners
U.S. President Barack Obama announced on Wednesday a complex $275 billion plan to help American homeowners avoid foreclosure by adjusting existing mortgages or refinancing with Federal help. Final rules for the program will be coming in two weeks, the President said.
According to the President, the Obama plan is aimed at two distinct groups of homeowners: an estimated 3 million or 4 million distressed homeowners who are in danger of foreclosure; and a potentially much larger number of people who are not in immediate distress but are paying rates higher than available to credit-worthy borrowers now and who would likely be resentful about bailouts going to others.
To help distressed homeowners, Mr. Obama will create a $75 billion program to subsidize loan modifications that would reduce a family’s monthly payment to as little as 31 percent of his or gross monthly income.
As envisioned, a mortgage lender would have to first make enough concessions to reduce a borrower’s payments to 38 percent of monthly income. The government will offer a series of financial incentives to encourage lenders to make the concessions. At that point, the government would match, on a dollar-for-dollar basis, additional reductions to bring the payment as low as 31 percent of monthly income.
The changes could be accomplished in several ways, from stretching out the repayment period of a loan to reducing the interest rate or reducing the outstanding principal.
But the plan would not prevent all foreclosures, because lenders could still decide whether to make concessions. If a lender decides that the cost of the concessions is higher than the cost of foreclosing, even with the government subsidies, then a borrower would probably still lose the property.
Incentives in the plan for mortgage-servicing companies include a $1,000 fee for each mortgage they restructure as well as up to $1,000 a year for the next three years if the borrower remains current. In addition, the government would pay up to $1,000 a year to reduce the size of a homeowner’s mortgage, if the borrower remained current.
Another part of the plan is aimed at homeowners who are not behind on their payments, but who owe more than their home is worth in the present market. For this group, Obama’s plan would make it much easier to refinance their homes and take advantage of the low interest rates now available.
The plan applies only to homeowners with loans owned or guaranteed by Fannie Mae and Freddie Mac. Anybody with such a mortgage would be allowed to refinance at today’s rates without needing a 20 percent down payment.
Normally, Fannie Mae and Freddie Mac require that such borrowers pay private mortgage insurance, which can add hundreds of dollars to a monthly payment. In effect, the government would be taking on the added risk, at no charge, that comes from lending to people with no financial stake in their house.
The third component of Obama’s plan is aimed at propping up the mortgage market by having Fannie Mae and Freddie Mac step up their purchases of mortgages and mortgage-backed securities. The Treasury Department will use its authority under a housing bill passed last year to provide up to $200 billion to each company to expand the size of their mortgage portfolios, ostensibly acting as a downward force on future mortgage rates.
Final rules for the program will be released in two week, Obama said.
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