By Sheryl Gay Stolberg & Edmund L. Andrews New York Times
Published: 02-19-09
MESA Ariz. President Obama pledged on Wednesday to help as many as nine million American homeowners refinance their mortgages or avert foreclosure an initiative he said would shore up distressed housing prices stabilize neighborhoods and slow a downward spiral that he said was unraveling homeownership the middle class and the American Dream itself."
The plan more ambitious than many housing analysts had expected was unveiled by Mr. Obama in a high school gymnasium here in a community that is among the nations hardest hit by the foreclosure crisis.
This plan will not save every home but it will give millions of families resigned to financial ruin a chance to rebuild" the president told the crowd. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate it will help to shore up housing prices for everyone."
The plan has three basic components. One would help homeowners who continue to make loan payments on time but are paying high interest rates and would otherwise not be able to refinance because they do not have enough equity or their houses are worth less than they borrowed.
A second would assist people who are at risk of foreclosure by providing incentives to lenders to alter the terms of loans to make them substantially more affordable to struggling homeowners. The third would try to assure that there is plenty of credit available for mortgages by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac the two government-controlled mortgage finance companies.
The announcement came a day after Mr. Obama signed his $787 billion economic recovery package and administration officials like Timothy F. Geithner the Treasury secretary made the case that they would work in tandem. In announcing the housing plan Mr. Obama struck a populist note criticizing speculators and lenders who knowingly took advantage of homebuyers" with the same vehemence he used in going after Wall Street bankers for giving themselves bonuses as their companies were seeking government help.
It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell" he said adding And it will not reward folks who bought homes they knew from the beginning they would never be able to afford."
The plan will take effect March 4 when the administration publishes detailed rules explaining it. Most of the plan can be enacted by Mr. Obama though his executive powers although part of it including changing the bankruptcy laws to allow homeowners to seek changes to their mortgages through bankruptcy proceedings will require legislation. Mr. Geithner said the administration was already in discussions with lawmakers on how to proceed.
In allowing homeowners who are not delinquent to qualify the plan breaks sharply from the housing policies of Mr. Obamas predecessor George W. Bush. Mr. Geithner and the new housing secretary Shaun Donovan said the administrations research had determined that with 10 percent of American homeowners either in foreclosure or in danger of it it was better to intervene early.
Mr. Obamas plan boils down to a handful of basic components that are aimed at two distinct groups of homeowners: an estimated three million to four million distressed homeowners who are in danger of foreclosure; and a potentially much larger number of people who are not in immediate distress but are paying rates higher than available to creditworthy borrowers now and who will probably be resentful about bailouts going to others.
To help distressed homeowners Mr. Obama will create a $75 billion program to subsidize loan modifications to reduce a familys monthly payment to as little as 31 percent of gross monthly income.
As envisioned a mortgage lender would have to first make enough concessions to reduce a borrowers payments to 38 percent of monthly income. The government will offer a series of financial incentives to encourage lenders to make those concessions.
At that point the government will match on a dollar-for-dollar basis additional reductions to bring the payment as low as 31 percent of monthly income.
The changes could be accomplished in several ways like stretching out the repayment period of a loan reducing the interest rate or reducing the outstanding principal.
But the plan would not come close to preventing all foreclosures because lenders would still have the last word on whether to make concessions. If a lender decides that the cost of the concessions is higher than the cost of foreclosing even with the government subsidies then a borrower will probably still lose the property.
That could be the case for many people who have lost jobs in the automobile industry and have little hope of being rehired. A family whose income has dropped by half and whose mortgage payment might now equal 100 percent of its monthly income may well be out of the programs reach.
The incentives for mortgage-servicing companies to tilt their calculation in favor of loan modification include a $1000 fee for each mortgage they restructure as well as up to $1000 a year for the next three years if the borrower remains current. In addition the government will pay up to $1000 a year to reduce the size of a homeowners mortgage if the borrower remains current.
A second major component of Mr. Obamas plan is aimed at most homeowners who are not behind on their payments but whose homes may be worth less than the outstanding amount on their mortgage or are no longer worth enough that the homeowners have enough equity to refinance. It could also assuage homeowners who are angry that seemingly irresponsible neighbors are being rescued.
For this group Mr. Obamas plan would make it much easier to refinance their homes and take advantage of the extremely low interest rates now available.
The plan would apply to people with fairly traditional loans that are owned or guaranteed by Fannie Mae and Freddie Mac. Anybody with such a mortgage would be allowed to refinance at todays rates which are about 5 percent without needing a 20 percent down payment.
Normally Fannie Mae and Freddie Mac require that such borrowers pay private mortgage insurance which can add hundreds of dollars to a monthly payment. In effect the government would be taking on the added risk at no charge that comes from lending to people with no financial stake in their house.
A third and a more vague component of Mr. Obamas plan is aimed at propping up the mortgage market as a whole by having Fannie Mae and Freddie Mac step up their purchases of mortgages and mortgage-backed securities.
To make that possible the Treasury Department will use its authority under a housing bill passed last year to provide more capital to both companies. The Bush administration had pledged to provide up to $100 billion to each company to keep it solvent. The Obama plan would increase that to $200 billion.
The plan would also allow the two mortgage companies to expand the size of their mortgage portfolios.
Sheryl Gay Stolberg reported from Mesa Ariz. and Edmund L. Andrews from Washington.
