UPDATE: Obama Administration: Housing Plan Will Help 7 Million-9 Million Restructure
18 Februar 2009 - 5:28PM
Dow Jones News
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 principals 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 to this point have
been underwhelming, 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.
Obama 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.
-By Michael R. Crittenden and Henry J. Pulizzi, Dow Jones
Newswires; 202-862-9256; henry.pulizzi@dowjones.com