WILL HOMEOWNER ASSISTANCE PLAN WORK?

President Obama’s newly announced $275B mortgage stimulus program has many parts, which means it is attacking the foreclosure problem from many sides. This will certainly help to put a bottom on home values, which are at the root of the foreclosure problem.

Below is a list of key elements of the plan outlined this week by President Obama that aims to aid as many as 9 million households in fending off foreclosures:

• Allows 4 million–5 million homeowners to refinance via government-sponsored mortgage giants Fannie Mae and Freddie Mac.
• Establishes $75 billion fund to reduce homeowners' monthly payments.
• Develops uniform rules for loan modifications across the mortgage industry.
• Bolsters Fannie and Freddie by buying $200B more of their shares.
• Allows Fannie and Freddie to hold $900 billion in mortgage-backed securities — a $50 billion increase.

A separate program would potentially help 3 million to 4 million additional homeowners with jumbo mortgages by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, so that payments are just 38 percent of gross monthly income, and the government would provide subsidies to the lender to lower it further to a 31 percent debt to income ratio.

FDIC Chairperson Sheila Bair has also come out with her long-awaited mortgage modification program that she believes will have an effect in months. This proposal is designed to promote wider adoption of such a systematic loan modification program:

• by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and
• sharing up to 50 percent of losses incurred if a modified loan should subsequently re-default

“We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009,” says the FDIC website. “Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan.”

Almost one in 10 home mortgages is either delinquent or in foreclosure, and analysts estimate that at as many as six million families could lose their homes over the next three years in the absence of government action. These programs will certainly help a certain percentage of them. The foreclosure rate for single-family homes is now above 6 percent of the 100 million + mortgages outstanding, 2 percent above the historical rate of 4.25 percent, so it is not the end of the world.

The plan will take effect March 4, when the administration publishes detailed rules explaining it. Except for the provision that empowers bankruptcy judges, almost all the other elements can be enacted by Mr. Obama without further action by Congress.

Harlan Green © 2009