President Obama says his plan to help stem the tide of foreclosures will help up to 9 million homeowners. As he unveiled the plan in Phoenix Wednesday, the president said the collapse of the housing market is reverberating across the financial markets, and threatening the entire U.S. economy. David Wessel, of The Wall Street Journal talks with Steve Inskeep about the president's plan that is estimated to cost $75 billion.
ARI SHAPIRO, host:
This is MORNING EDITION from NPR News. I'm Ari Shapiro.
STEVE INSKEEP, host:
And I'm Steve Inskeep.
We're going to try to understand, this morning, what President Obama will do for homeowners and what he won't. Even with all the federal money that's been borrowed and spent, for all the financial firms liquidated or saved, relatively little assistance has gone to people struggling to pay the mortgage.
Yesterday, the president became the latest official to say he would change that.
President BARACK OBAMA: In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to continue to deepen - a crisis which is unraveling home ownership, the middle class and the American dream itself.
INSKEEP: So that's the argument for acting. David Wessel of the Wall Street Journal is here to help us understand how the president is acting. David, welcome back to the program.
Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning, Steve.
INSKEEP: Let me give you a couple of hypothetical situations that are not hypothetical at all for millions of homeowners. Let's say that I'm falling behind on my mortgage, my interest rate went up or I lost my job, whatever - I'm in trouble with the mortgage. What does the president's plan do for me?
Mr. WESSEL: Well, for three to four million homeowners, many of whom have subprime mortgages, who may be behind in their payments and who cannot afford the payments that the banks are charging them, President Obama is going to allocate $75 billion to get their payments reduced and maybe even get the principal amount of the loan reduced.
INSKEEP: So, there is some help there. You could end up paying less, depending basically on your own income and whether you can afford a reasonable amount of that for the mortgage.
Mr. WESSEL: Your own income, the value of your house versus the mortgage, your willingness of your lender to participate. There are lots of bells and whistles. The details are quite complicated and they're not all out yet, but basically that's the idea.
INSKEEP: Well, let me talk about another hypothetical situation, which, again, is real for lots of people, millions of people. Let's say I'm making the payments but I'm underwater. The house is worth less than my mortgage right now. Does this plan do anything for me?
Mr. WESSEL: That's the big change compared to what we'd seen before. Roughly one-in-ten of every American homeowners has a mortgage that's bigger than the value of his or her house. And what President Obama says is that he's going to ask Fannie Mae and Freddie Mac, the two government-controlled mortgage giants, to refinance those mortgages. And he says it could be four to five million homeowners who qualify for that.
INSKEEP: So, you could refinance even if you don't have the underlying home value anymore to support a new mortgage?
Mr. WESSEL: It will be for people whose equity in their house is somewhere between 80 percent and 105 percent of the value of the house.
INSKEEP: So, you would normally expect to have a big down payment or some kind of equity. They'll just kind of overlook that for the moment.
Mr. WESSEL: Correct.
INSKEEP: Well, now, let me ask something, though, David Wessel. You mentioned bells and whistles, and one of them seems to be the bell and whistle that has prevented many of these plans from working so far. Does the president have the power to force lenders to change the terms or modify mortgages?
Mr. WESSEL: In most cases, the president is trying to give carrots to the lenders so they will refinance voluntarily. In some cases, the lender will benefit because the government will help the people pay the loan, and that's good for the lender - they're more likely to get the money back. In other cases, there are actual cash payments to the lenders or the servicers - $1,000 here; $1,500 there - to encourage them to do it.
There are a couple of sticks. One is that the president wants to change the law so that if you own a house and go into bankruptcy, you can reduce your mortgage payments. That's not now currently possible, and for many Americans he wants to change the law to make that possible. That, of course, makes the lender more willing to cut a deal.
And also for banks that take more money in the future from the government through the so-called TARP program, there will be more restrictions that force them to consider refinancing or modifications.
INSKEEP: Well now, David, given that previous plans, here, have been tried and have not worked, how are the markets responding to this one?
Mr. WESSEL: Well, a lot better than they reacted to the earlier announcement by Treasury Secretary Tim Geithner, about his bank rescue plan. This one had more detail than that and was more aggressive, exceeded the expectations. Not to say there's not a lot of criticism. Some people say it just isn't enough to solve the housing problem because it's so enormous. And of course there are those people who will be left out of the plan, people who, for instance, have larger-than-normal mortgages or more-expensive-than-normal houses, who won't benefit. And then there's the very tough question of: will the plan encourage some people who don't deserve help, who are paying their mortgages and can't afford it, to somehow do things that'll allow them to qualify for government aid?
In the end, it's going to depend on the details and how well it's actually implemented. If it works it'll be hailed as a big success, but there's a lot of wait and see out there.
INSKEEP: David Wessel of the Wall Street Journal. Thanks very much.
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President Obama outlined a plan Wednesday to help fix the home loan crisis by stemming the flow of foreclosures.
Homeowners have waited for months to see specific proposals about how to improve the housing sector, which has suffered from a rising tide of foreclosures and price declines in almost every market nationwide.
The Obama administration says its program, set to begin March 4, could help up to 9 million families. But analysts say the plan won't necessarily help all homeowners.
Is this finally going to provide some relief for homeowners?
"I think there's still a lot of people that are going to find themselves underwater in their mortgages and probably not getting much help out of this," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. Underwater means that someone's house is worth less than the balance on their mortgage.
Banking analyst Bert Ely of Ely & Company concurs. He says the plan is an attempt to work within the existing framework: "I'm very skeptical that they're going to be able to get anywhere near the number of mortgage modifications."
Michael van Zalingen, director of homeownership services for the Neighborhood Housing Services of Chicago, is optimistic that if the program works as devised, it will provide payment relief to about half of the 9 million struggling homeowners targeted by the plan.
Alex Pollock, a resident fellow at the American Enterprise Institute, says "average" homeowners will be the ones to foot the bill. And he says they won't benefit from the plan since they aren't delinquent on their mortgages.
Who is benefiting from this plan?
Homeowners on the verge of becoming delinquent or those who have missed a few payments are the prime candidates for assistance. The plan, van Zalingen says, is designed to assist those with high interest rates, but there are ways it could also help to improve the housing economy in the long term.
"If you can stop millions of foreclosures over the next few years, you get to stabilizing the housing market so that prospective homeowners can contemplate home ownership without such a wary eye," he says.
What obstacles does the plan face?
Baker says the plan won't change the fundamental problem for millions of people who are underwater with their mortgages: "Some of them will be forced into foreclosure. Some of them will opt to walk away from loans where they see no prospect of getting home equity."
For some people who do walk away from their homes, renting may be a better solution. That's especially the case if it means that they can rent for less than they'd have to spend to stay in their home — even with government assistance.
The administration's plan calls for lenders to reduce monthly interest payments to 38 percent of the mortgage holder's income. Then, the government would step in with funding to help reduce payments to 31 percent of the individual's income.
Baker notes that this 7-percentage-point funding assistance will be in the form of a check that goes directly to banks — not to homeowners. "We should be focused on trying to get as much money for homeowners as possible and zero for banks," Baker says.
Baker says another key part of the administration's plan enables lenders, with the assistance of the Treasury Department, to reduce monthly payments by lowering the principal due on the mortgage.
How soon will the plan begin to show results, and how will any progress be measured?
Housing experts say it will take at least three months to start seeing results. Positive signs would include an increase in the number of loan modifications, a decrease in reported delinquent loans and subsequently lower foreclosure filings compared to the prior year.
How will homeowners seek assistance?
Homeowners won't be able to dial a 1-800 number to ask for help. They'll have to go through their lenders, and lenders will have to take the initiative. This may simply create an incentive for lenders to bring in their worst cases to the government and then do a write-down to get those loans off of their books, Baker says.
What about Fannie Mae and Freddie Mac's role?
Fannie Mae and Freddie Mac are already part of the government's tool kit, but this proposal — which calls for increasing the amount of capital the government will put into these two mortgage finance giants — underscores that they've essentially been turned into "government housing banks," says Pollock of the American Enterprise Institute.
He says it makes sense to use the two mortgage financing giants as "vehicles for doing refinancing of troubled mortgages."
What are the long-term potential negative impacts for the mortgage industry?
The industry may have to brace for more losses that have yet to surface. Losses could arise as a result of continued layoffs and declining home values.
One part of the plan calls for a $10 billion insurance fund that the Treasury Department would create to discourage lenders from foreclosing on potentially viable mortgages. But Baker says lenders are likely to exhaust this money quickly because the problem is so big. He says establishing this kind of a fund is "bad policy."
"For whatever reason, there's a reluctance to still come to grips with the housing bubble," he says. Large chunks of the country — including most of the Northeast and many parts of California — are still in a bubble, he says, adding that the housing market has not yet reached its bottom.