The Obama administration on Wednesday unveiled the U.S.
government's most aggressive attempt yet to deal with the
foreclosure crisis, pledging billions of dollars in new programs to
help seven million to nine million borrowers.
The ambitious proposal would address the housing crisis on a
variety of fronts -- helping millions of borrowers refinance into
more affordable loans, preventing at-risk or "underwater" borrowers
from falling behind on payments, and taking advantage of government
control of Fannie Mae (FNM) and Freddie Mac (FRE) to stabilize
house prices and provide much-needed liquidity.
It will also include enticements to encourage both borrowers and
lenders to work to prevent foreclosures, including payments to
reduce the principal on loans and bonuses for mortgage firms that
successfully rework mortgages.
Obama, who will formally introduce the plan in remarks in
Phoenix later Wednesday, will say that the government cannot fail
to address a housing crisis that has brought down the broader
economy.
"In the end, all of us are paying a price for this home mortgage
crisis," Obama will say, according to a copy of his remarks. "And
all of us will pay an even steeper price if we allow this crisis to
deepen - a crisis which is unraveling homeownership, the middle
class and the American Dream itself."
The centerpiece of the program is a plan to let four million to
five million homeowners currently unable to refinance their loans
because of falling home prices do so using Fannie Mae and Freddie
Mac. It would be limited to borrowers who took out a conforming
loan owned or guaranteed by one of the two government-sponsored
enterprises, and would allow them to refinance even if they owe
more than 80% on the value of their homes.
"For many families, a low-cost refinancing could reduce mortgage
payments by thousands of dollars per year," according to background
documents released by the Treasury Department.
That proposal will be coupled with a $75 billion "homeowner
stability initiative" that includes standardized industry
guidelines for modifying loans, new requirements for firms that
receive government rescue funds, and allowing bankruptcy judges to
rework the terms of some loans.
This second proposal will focus on reaching borrowers who are
not yet in the foreclosure process or who are underwater, meaning
they owe more on their loan than the value of their house. The
three-year plan will be restricted to borrowers who live in their
homes, and who have loans within the Fannie Mae and Freddie Mac
conforming loan limits.
The goal would be to reduce monthly mortgage payments by having
lenders reduce the interest rate on mortgages so that the payment
is no more than 38% of a borrowers income. At that point, the
Treasury will match dollar-for-dollar any further interest rate
reductions until a 31% debt-to-income ratio is reached. The new
payments would then be kept in place for five years.
Lenders would also have the option of reducing a borrower's
principal to lower the monthly payments, with Treasury sharing the
partial costs of any reduction. The financial services industry has
generally shied away from reducing borrowers' principal in the
various voluntary efforts that have been conceived over the last
two years.
To encourage loan-modification efforts, which had been
underwhelming under Bush administration initiatives, the government
would provide servicers with various incentives. Firms would
receive an up-front fee of $1,000 for each eligible modification,
and could then earn an additional $3,000 in annual bonus payments
for successful modifications. Mortgage investors would also be
eligible for a $1,500 payment, and mortgage servicers $500, for
working with borrowers who have not yet fallen behind on their
loans.
Likewise, to encourage borrowers to stay current on their
payments, the $75 billion program would include money to provide up
to $5,000 over five years to borrowers who stay current. The money
would be targeted at reducing the principal on borrowers'
mortgages.
The Obama administration was quick to address concerns that the
plan could be exploited by homeowners who took risky bets on the
housing market. Obama said the proposal is focused on those who
"played by the rules"; People whose traditional mortgages are
"underwater" will be eligible for refinanced loans, while people
with sub-prime mortgages will be able to modify their loans.
"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," Obama said.
Changes at Fannie Mae and Freddie Mac are large components of
the president's plan, and could reignite political debate over the
government-controlled firms' role in the housing market.
Under the proposal, the Treasury Department will boost its
funding commitment to the companies from $100 billion to $200
billion each and increase the size of their retained mortgage
portfolios by $50 billion to $900 billion, moves designed to show
financial markets that the government stands tightly behind the
firms. "We're also going to work with Fannie and Freddie on other
strategies to bolster the mortgage markets, like working with state
housing finance agencies to increase their liquidity," Obama will
say. "And as we seek to ensure that these institutions continue to
perform what is a vital function on behalf of middle class
families, we also need to maintain transparency and strong
oversight so that they do so in responsible and effective
ways."
Obama also said that any financial firms receiving, or hoping to
receive, taxpayer financial assistance through the $700 billion
Troubled Asset Relief Program would have to agree to modify their
loan books along the guidelines established in the housing
proposals.
As outlined by Obama, the housing plan is far more detailed than
the administration's financial rescue package, which investors
panned last week. It's unclear, however, how much input Wall Street
had in crafting the housing plan, the total cost of which also was
unclear.
Amid concerns that taxpayer money could be used to bail out
homeowners who bit off more than they could chew, Obama painted a
dire picture of the housing crisis, saying that its pain is being
felt outside foreclosure-battered neighborhoods. "Companies in your
community that depend on the housing market - construction
companies and home furnishing stores, painters and landscapers -
they're cutting back and laying people off," Obama will say.
The plan, like the $787 billion stimulus package Obama signed
into law Tuesday, is likely to spark partisan warfare,
nonetheless.
House Republican Leader John Boehner, R-Ohio, and GOP Whip Eric
Cantor, R-Va., sent Obama a letter asking a series of questions on
the plan, such as how the administration will prevent homeowners
who receive aid from eventually going back into default.
-By Michael R. Crittenden and Henry J. Pulizzi, Dow Jones
Newswires; 202-862-9256; henry.pulizzi@dowjones.com
(Maya Jackson-Randall contributed to this report.)