How The Obama Mortgage Plan Works

President Barack Obama says up to 9 million struggling homeowners could get help from the housing rescue plan he outlined. The plan commits $275 billion in government funds to the effort and would help some homeowners reduce home payments by refinancing.

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From NPR News this is ALL THINGS CONSIDERED. I'm Michele Norris.

President Barack Obama unveiled a new foreclosure-release effort today that he says could help up to 9 million struggling homeowners. Previous programs have all pretty much failed. But the plan announced today is both broader and more aggressive than previous efforts. The plan commits up to $275 billion in government funds to keep people in their homes. NPR's John Ydstie now has more on how the plan works.

JOHN YDSTIE: There are three main ways homeowners could be helped by this plan. One involves a simple refinancing for homeowners who have loans owned or guaranteed by the government-controlled mortgage giants Fannie Mae and Freddie Mac. Right now, the problem is that because of big declines in home values across the country, many of those homeowners owe more on their mortgages than their homes are worth. They could benefit from lower interest rates, but no one will refinance their loans. President Obama said today he would loosen restrictions on Fannie and Freddie to make it possible for these people to refinance.

BARACK OBAMA: And the estimated cost to taxpayers would be roughly zero. While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.

YDSTIE: But the government will increase the backstop it's providing for Fannie and Freddie by $200 billion. The president says this element of the plan could help 4 to 5 million homeowners reduce their monthly mortgage payments.

MARK ZANDI: That's helpful, that's good, but that's not where the problem is.

YDSTIE: Economist Mark Zandi of Moodyseconomy.com.

ZANDI: The real problem with foreclosure lies in loans that Fannie and Freddie don't have a lot to do with - the nonconforming market, subprime loans, a lot of alternative-A loans, some jumbo loans - and that's where most of the foreclosures are occurring and will occur. And they don't benefit from that part of the plan.

YDSTIE: But the second element of the new housing rescue package is designed to help homeowners with those exotic mortgages. As President Obama explained today, it involves the government and lenders partnering to reduce monthly payments for those homeowners.

(SOUNDBITE OF CLAPPING)

OBAMA: Here is what this means. If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, then we'll make up part of the gap between what the old payments were and what the new payments will be.

YDSTIE: And in addition, the government would provide incentives to mortgage servicers, including a thousand dollars for every modified loan. The program would be voluntary, although any financial institution should take rescue money from the government in the future would be required to participate. The president estimated 3 to 4 million homeowners would be aided by this part of the plan. Mark Zandi thinks this element of the package depends too much on interest-rate reductions. He argues that given just how far home values have fallen, reducing principal on loans is necessary to halt foreclosures quickly.

ZANDI: I think that would have been the most straightforward, clean and quickest way to address this problem.

YDSTIE: But Susan Wachter disagrees. She is a professor of real estate at the University of Pennsylvania's Wharton School.

SUSAN WACHTER: The evidence out there is that while principal reduction is important, what's really key is the mortgage payment. That's what needs to be reduced. And if that reduction comes through interest reductions or principal reductions - bottom line, it's what people pay that needs to be affordable.

YDSTIE: Wachter says overall, she thinks this is a good plan and will have an impact. The last major element in President Obama's housing rescue package depends on the passage of bankruptcy legislation moving through the Congress. It will allow bankruptcy judges to write down the value of the mortgage owed by a homeowner to the current value of the home. And to develop a plan for homeowners to continue making payments. John Ydstie, NPR News, Washington.

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Obama Sets $75 Billion Plan To Stem Foreclosures

President Obama discusses his plan to deal with the home mortgage crisis. i i

President Obama discusses his plan to deal with the home mortgage crisis Wednesday in a speech in Mesa, Ariz. Jim Watson/AFP/Getty Images hide caption

itoggle caption Jim Watson/AFP/Getty Images
President Obama discusses his plan to deal with the home mortgage crisis.

President Obama discusses his plan to deal with the home mortgage crisis Wednesday in a speech in Mesa, Ariz.

Jim Watson/AFP/Getty Images

In Depth

The Obama administration says its mortgage-assistance program could help up to 9 million families. But analysts say the plan has potential problems and won't necessarily help all homeowners.

Obama's Plan

Following are highlights of President Obama's plan to reduce mortgage foreclosures.

  • Allow an estimated 4 million to 5 million currently ineligible homeowners who get their mortgages through Fannie Mae or Freddie Mac to refinance at lower rates.
  • Create incentives for lenders to work with borrowers to modify the terms of subprime loans at risk of default and foreclosure.
  • Take "major steps" to keep mortgage rates low for millions of middle-class families seeking new mortgages.
  • Pursue reforms designed to help families avoid foreclosure, including allowing bankruptcy judges to reduce mortgages on primary residences to their fair market value.

Source: The White House

Graphic: Tracking Foreclosure Filings i i
Graphic: Tracking Foreclosure Filings

President Obama on Wednesday unveiled an aggressive plan that aims to help up to 9 million homeowners avoid foreclosure, a major cause of the nation's financial crisis.

The president announced details of the plan in a speech in suburban Phoenix, where massive foreclosures drove down the median price of an existing home to $136,000 last month — a 49 percent drop from 2006, according to The Arizona Republic.

The plan is designed to help homeowners whose mortgages exceed the value of their home and those who are on the verge of foreclosure. It includes $75 billion to cut the home payments of some homeowners and $200 billion from the Treasury Department to purchase preferred stock in Fannie Mae and Freddie Mac — double what was originally pledged.

"Through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages so they can avoid foreclosure," Obama said in remarks to a crowd at a Mesa, Ariz., high school. "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."

The announcement came shortly after the Commerce Department released even more bad news about the housing market. The government report showed that housing starts fell nearly 17 percent in January to a seasonally adjusted annual rate of 466,000 units, a record low. Applications for building permits, an indicator of future activity, also dropped.

The president's initiative calls for allowing 4 million to 5 million ineligible homeowners with mortgages through Fannie Mae or Freddie Mac to refinance their home loans at lower rates. To accomplish this, Obama said he would remove restrictions that prevent Fannie and Freddie from refinancing mortgages valued at more than 80 percent of a home's worth.

Housing Secretary Shaun Donovan stressed that homeowners don't need to be delinquent in payments to get help.

The plan also offers financial incentives for lenders to reduce the mortgage payments of as many as 4 million homeowners who are at risk of losing their homes. Under the $75 billion Homeowner Stability Initiative, lenders would cut mortgage payments to no more than 31 percent of the borrower's income.

"My plan establishes clear guidelines for the entire mortgage industry that will encourage lenders to modify mortgages on primary residences. Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines — which will be in place two weeks from today," Obama said.

The plan is designed to aid homeowners and entire communities where double-digit foreclosure rates have led to declining properties and a shrinking tax base. Last year, there were nearly 3.2 million foreclosure filings — including default notices, auction sale notices and bank repossessions — on more than 2.3 million properties during 2008, an 81 percent increase in total properties from 2007, according to RealtyTrac, which tracks foreclosures.

The president stressed that the plan would not rescue speculators who made risky investments on homes to resell, dishonest lenders who distorted facts to get loans approved, or people who bought homes they knew they could not afford.

In addition, the Treasury Department announced it would provide up to $200 billion to Fannie Mae and Freddie Mac to stabilize the markets and hold down mortgage rates. In 2008, almost three-quarters of new home loans were financed or guaranteed by Fannie Mae and Freddie Mac.

"The increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners," said a Treasury Department statement.

The president announced his housing initiative just one day after he signed a $787 billion economic stimulus plan that aims to create or save 3.5 million jobs. On Wednesday, he said part of the economic stimulus included $2 billion in competitive grants to communities looking for innovative ways to avoid foreclosures.

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