President Barack Obama today introduced a plan intended to stabilize the housing market by ending the seemingly endless circle of foreclosures and home price declines that has proved so economically damaging.
The meltdown of the housing and mortgage markets “threatens the stability of our economy and strikes at the heart of the middle class,” President Obama said, speaking in Mesa, Ariz. “In the end, all of us are paying for this crisis.”
His proposal, called the Homeowner and Neighborhood Stability Plan, seeks to solve the foreclosure crisis in three main ways, detailed below. According to the president, the plan will help between 7 million and 9 million families restructure and refinance their mortgages, preventing foreclosures. He said he also believes it will curtail the slide of home prices. "But the plan will not rescue the unscrupulous or irresponsible,” Obama said. It also will not help speculators, or “dishonest” lenders, or people “who bought homes knowing they could never afford them. So I just want to make this clear: This plan will not save every home. But it will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy."
What needs to be reversed for the housing market to become healthy again, according to the president, is “the erosion of common values, and quite frankly, common sense” that has resulted in millions of foreclosures around the country. The plan will require “everyone to take a step back and take responsibility for their actions,” Obama said, including “individuals who have to learn to live within their means again and not assume that housing prices are going to go up 20%, 30%, 40% every year.”
Here’s how common sense and responsibility will return to the housing market, and subsequently, the economy, under the Obama plan:
First, it will reward homeowners who have kept up on their payments on their conforming loans—even if they owe more than their home is worth--by allowing them to refinance those mortgages through Fannie Mae and Freddie Mac. President Obama said the government would no longer require homeowners to have at least 20 percent equity in their homes to refinance through this program, which could help an estimated 4 million to 5 million people who had previously been ineligible to refinance their loans. This part of the plan will free up cash for homeowners who lower their payment by reducing their interest rate through refinancing. More importantly, though, it will remove the incentives for homeowners to fall behind on their mortgage payments in hopes of having a better shot at a loan modification from their lender. According to the president, this part of his plan will be cost-neutral because any expense involved will be offset by “reductions in defaults and foreclosure.”
Speculators and house flippers will not be eligible for this refinancing program, according to Treasury.
Second, the government plans to spend $75 billion to help homeowners at risk of foreclosure by offering incentives to lenders and servicers who effectively modify mortgages for the long term. Similar to the Indy Mac approach, lenders will be required to adjust a loan’s interest rate so that the payment takes no more than 38 percent of the borrower’s monthly income. Under Obama’s plan, the government then will match the lender’s contribution dollar-for-dollar to reduce the payment by an additional 7 percentage points so that the borrower’s payment is no more than 31 percent of his or her monthly income.
As part of this effort, Treasury said the government would further sweeten the deal for lenders and servicers who participate—if the modification is effective. Servicers would earn $1,000 for each modification and payments of as much as $1,000 annually per loan per year for three years as long as the borrower continues to pay the mortgage on time.
According to Treasury, the government is also establishing a special insurance fund to encourage lenders to modify loans and discourage foreclosures by protecting them from home price declines on those homes that these lenders do refinance. This fund could be as large as $10 billion and pay lenders “an additional insurance payment on each modified loan, linked to declines in the home price index,” the Treasury said.
Homeowners with newly modified loans also will get a carrot to encourage good financial behavior; the government will contribute as much as $1,000 annually for five years to reduce their mortgage’s principal if the borrower stays current on their mortgage.
Third, the Treasury will help Fannie and Freddie keep mortgage rates low by purchasing their mortgage-backed securities, boosting the allowable size of the two firms’ retained mortgage portfolios, and increasing its preferred stock agreements in the two government-sponsored enterprises.
Additionally, Obama said that the government would provide another $2 billion in Neighborhood Stabilization Program funds to help communities seriously suffering in foreclosure crisis. He also noted that he supported cramdowns, or the ability of bankruptcy court judges to reduce principal balances on borrowers’ home loans.
Alison Rice is senior editor, online, at BUILDER magazine. Senior editor John Caulfield also contributed to this article.