President Obama presented his foreclosure prevention plan to the country from Mesa, Arizona yesterday. Larger than expected, the plan has 3 main components (including a $75 billion loan modification initiative) that are expected to save 7 to 9 million homes from foreclosure, which Obama explained:
"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments.
Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure. And we are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too - as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs."
He also repeatedly spoke about how this plan is specifically directed only at the responsible borrowers and banks, not the unscrupulous or dishonest:
"But I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibility, distorting the facts and dismissing the fine print at the expense of buyers who didn't know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford. In short, this plan will not save every home."
The National Association of Realtors put together a summary of the plan detailing the three main components:
FIRST MAJOR COMPONENT
Enabling refinancing for responsible homeowners to lower monthly payments for homes that are underwater or close to it. Right now it is nearly impossible to refinance to access today's low mortgage rates if a borrower doesn't have at least 20% equity. Now the government through Fannie Mae and Freddie Mac will backstop mortgages well above the 80% loan to value ratio for conforming loans. This should allow 4-5 million homeowners to refinance, even if they are not in default in any way.
SECOND MAJOR COMPONENT
$75 Billion Homeowner Stability Initiative to Reach up to 3 to 4 Million At-Risk Homeowners. The goal of the 3-year Homeowner Stability Initiative is to reduce the monthly payment of homeowners to affordable levels using $75 billion from TARP and the GSE's (Fannie and Freddie). The program will be available for home owner-occupants "at risk of imminent default" even if they are current in making mortgage payments, as well as those already delinquent. It will only applies to mortgages at or below the GSE conforming loan limits. Key elements of the plan:
- The lender world first be required to reduce rates, without assistance, so the monthly payment does not exceed 38 percent of borrower income (debt-to-income ratio of 38 percent). After that, federal assistance would be used to match, on a dollar-for-dollar basis, further reductions to bring the debt-to-income ratio down to 31 percent.
- After 5 years, the rate could increase gradually to the loan rate in effect at the time of the modification.
- Lenders may reduce monthly payments by reducing principal. Federal assistance would share the cost (up to the amount the lender would receive for reducing interest rates).
- As an incentive to loan servicers, they will receive $1,000 up front for each qualified loan modification. For borrowers who stay current on the modified loan, servicers will receive a monthly "pay for success" fees up to $1,000 a year for 3 years.
- As an incentive to borrowers, borrowers will receive a monthly reduction in their mortgage balance, up to $1,000 a year for 5 years. As an additional incentive to help borrowers avoid going into delinquency, servicers will receive $500 and mortgage holders will receive $1,500, if they modify at-risk mortgages before the borrower becomes delinquent.
- As an incentive for lenders to modify more mortgages, the Obama plan-together with the FDIC-has developed a partial guarantee initiative.
- The Treasury Department will establish an insurance fund of up to $10 billion to discourage lenders from foreclosing on mortgages, by limiting their lose if home prices decline more than expected. Mortgage holders of modified mortgages could receive a payment on each modified loan, linked to home price index declines. Treasury will establish uniform guidelines for loan modifications, working with bank regulators and the FDIC. All financial institutions receiving Financial Stability Plan assistance will have to agree to follow the guidance. The GSEs will use the guidance for their loans, and the government will work to apply them "when permissible and appropriate" to all federally owned or guaranteed loans, including Ginnie Mae, FHA, Treasury, Federal Reserve, FDIC, VA and Agriculture loans.
- The plan includes other elements:
- Strong oversight .
- "Allow Judicial Modification of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options." Only mortgages under GSE loan limits would qualify. Homeowners must first seek a loan modification. Legislation is needed. The plan also anticipates legislation to give FHA and VA authority to pay partial claims if there is a bankruptcy or voluntary loan modification so holders of FHA and VA guaranteed loans are not hurt.
- Funding for displaced renters and neighborhood stabilization.
- Improving Hope for Homeowners and other FHA programs.
THIRD MAJOR COMPONENT
Supporting Low Mortgage Rates by Strengthening Confidence in Fannie Mae and Freddie Mac. The Obama Plan beefs up the current support for the GSEs. The Treasury Department is doubling, from $100 billion to $200 billion for each GSE, its pledge to invest money to make sure that the GSEs maintain a positive net worth. This will further assure that the federal government is committed to maintaining the mission of the GSEs. In a statement issued today, Director Lockhart described this mission as "providing much-needed liquidity, stability and affordability to the housing market at this time." He went on to say that doubling the commitment "should remove any possible concerns debt and mortgage-backed securities investors have about the strong commitment of the U.S. Government to support Fannie Mae and Freddie Mac." He expects the increased commitment to help keep interest rates low, which will help both current and future homeowners. The additional $200 billion is from HERA in connection with the conservatorship, not from the Financial Stability Plan or TARP. Treasury will continue to buy GSE MBSs, as announced when the GSEs were placed into conservatorship. The GSEs will be able to increase their portfolios by $50 billion to $900 billion, and increase their outstanding debt. The Administration will work with the GSEs to support state housing finance agencies.
What's my take?
Clearly components 1 and 3 are geared towards helping all homeowners, not just those at risk of default, so the plan wasn't seen as just bailing out "irresponsible" borrowers and lenders. There will still be some bitterness from some about bailing out people who "can't help themselves", but I think this effectively takes that argument away because it gives everyone a little piece of the pie. Plus, as we see the economic turmoil we're dealing with as a country, putting a floor under home prices is a huge component of turning the economy around. This plan, no matter how distasteful to some, is a key part of that. The rate of foreclosure must be slowed. Obviously, for dishonest lending and borrowing, there should be no assistance and that's what Obama is preaching.
Component 2 is the major portion of this plan and creates a "standard" mortgage modification plan with carrots (and sticks) from the government to incentivize banks to work with borrowers at high risk of default to get them into loans that can actually be paid back. Will it work? I hope so - more and more lenders are starting to realize that it makes more sense to modify loans than foreclose. This plan gives a little extra incentive to banks and help to borrowers to work together to create a mortgage that works and won't end up in re-default. But the plan doesn't address some issues, specifically jumbo loan amounts for which default rates are starting to rise as the unemployment rate goes up and the plan only applies to homeowners - out of "fairness" I guess. The only issue is that a large chunk of potential foreclosures in the hardest hit parts of the country are developer or investor owned and those will not be prevented under the plan.
Nonetheless, the plan is a big step in the right direction and will prevent many foreclosures that would otherwise happen. Keeping that distressed inventory off the market will help the national housing market start to reach a bottom.
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