President Barack Obama's home mortgage relief program is even bigger than the administration had been suggesting. The cost is $75 billion. The plan aims to prevent as many as 9 million homeowners from being evicted and to stabilize housing markets.
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Millions of Americans who risk losing their homes to foreclosure could get some relief under a plan that President Obama outlined yesterday. In a moment, we'll hear what analysts and people in the housing industry are saying about the plan, but first some details of what's in it.
For starters, it won't be cheap. Mr. Obama wants to spend at least $75 billion, and perhaps a lot more, to help families go from monthly mortgages they cannot afford to lower payments that they can. NPR's Scott Horsley was traveling with the president. He has this report.
SCOTT HORSLEY: Until now the federal government has been urging lenders to give struggling homeowners a break voluntarily, but that hasn't slowed the wave of defaults. A record 2.3 million home loans went into foreclosure last year. With even more home losses expected this year, President Obama decided it's time to put some real money on the table.
President BARACK OBAMA: There will be a cost associated with this plan, but by making these investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow, costs that are borne not just by families with troubled loans, but by their neighbors and communities and by our economy as a whole.
HORSLEY: Under the $75 billion plan Mr. Obama outlined in Arizona yesterday, lenders would be encouraged to restructure home loans so the monthly payment is no more than 31 percent of a borrower's income - a ratio that's generally considered affordable. In return, the government would reimburse the lender for up to half the difference between the new loan and the old one.
President OBAMA: Lenders will need to lower interest rates and share in the costs of reducing monthly payments in order to prevent another wave of foreclosures. Borrowers will be required to make payments on time in return for this opportunity to reduce those payments.
HORSLEY: The plan also includes an upfront incentive for loan servicers who agree to the restructuring and rewards for servicers and borrowers if they keep the new loan on track.
A second part of the president's plan is aimed at people who are not in danger of defaulting on their mortgage but who could still save money if they were able to refinance. HUD Secretary Shaun Donovan estimates there are four to five million families who are ineligible to refinance into government-backed loans because falling home prices have stripped them of the required 20 percent home equity.
Secretary SHAUN DONOVAN (Department of Housing and Urban Development): These families have seen, through no fault of their own, values in their communities on houses drop by 20, 30, 40, even 50 percent, and find themselves in a situation where even if they're holding a mortgage that is far above market rates, they cannot take advantage of refinancing down to what are really historically low mortgage rates.
HORSLEY: The president's plan would relax the 20 percent equity requirement so more borrowers could refinance, saving an average of more than $2,000 a year.
The Treasury Department is also taking steps to help mortgage giants Fannie Mae and Freddie Mac keep interest rates low. Treasury Secretary Timothy Geithner says despite the high price tag of these programs, they amount to smart economics.
Secretary TIMOTHY GEITHNER (Department of Treasury): By helping keep mortgage rates down and helping reduce monthly payments, you're putting money in the hands of Americans. In that case it acts like stimulus. Second is, by keeping interest rates low, by making it more affordable for people to stay in their homes and by reducing the amount of foreclosures ahead, we can reduce the risk the housing prices fall further than they otherwise would.
HORSLEY: President Obama argued during the campaign helping homeowners is an important step in shoring up the shaky banking system. HUD Secretary Donovan said yesterday stemming the rising tide of foreclosures could make some of those mortgage-backed securities banks are holding a little less radioactive.
Sec. DONOVAN: The reason they've been toxic is because families haven't been able to pay. And so this will take millions of mortgages that currently aren't affordable to families and make them affordable. That will also help to stabilize the balance sheets of these banks.
HORSLEY: The president's plan drew immediate skepticism, though, from Republicans in Congress, who suggest it's simply rewarding borrowers and lenders who've behaved irresponsibly. Most of the money for the foreclosure plan has already been authorized by Congress, so the administration won't need spending permission from Capitol Hill. Asked why the plan had grown from early estimates of 50 billion to $75 billion, Treasury Secretary Geithner said that's how much money is needed to make a program like this work.
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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.