LYNN NEARY, host:
Earlier today, President Obama laid out his plan to fight foreclosures. Speaking in Arizona, he said 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 deepen.
(Soundbite of speech, February 18, 2009)
President BARACK OBAMA: In Phoenix and its surrounding suburbs, the American dream is being tested by a home-mortgage crisis that not only threatens the stability of our economy, but also the stability of families and neighborhoods. It's a crisis that strikes at the heart of the middle class, the homes in which we invest our savings and build our lives, raise our families and plant roots in our communities.
NEARY: The plan will allow millions of Americans to restructure or refinance their mortgages and help keep them from losing their homes. So, what exactly is in the plan, and will it help you? If you're having trouble and have questions about the president's plan, give us a call, 800-989-8255; or send us an email to email@example.com. Mark Zandi is chief economist at Moody's Economy.com. He's with us from his office in West Chester, Pennsylvania. Good to have you with us, Mr. Zandi.
Mr. MARK ZANDI (Chief Economist, Moody's Economy.com): Thank you very much.
NEARY: Let's talk about some of the specifics that the president outlined today in that speech in Arizona. First, he said this plan will make it possible for millions of homeowners who got mortgages through Fannie Mae or Freddie Mac to refinance at lower rates. How will that work?
Mr. ZANDI: Well, for those homeowners that are - have a so-called conforming mortgage - it's a mortgage that's either owned by Fannie or Freddie or insured by Fannie and Freddie - they can refinance now to a lower interest rate, if they - even if they don't have enough equity in their home. Most conforming mortgages need at least 20 percent equity. If you had less than that, then you couldn't refinance it and get this lower rate, but now, under this plan, Fannie and Freddie will be able to refinance you and get you that lower rate, lower your monthly mortgage payment.
NEARY: Now, is that obvious to people if their mortgage is held by Fannie or Freddie?
Mr. ZANDI: Probably not, but I'm sure Fannie and Freddie will make sure that you know, and you probably should investigate and to see, make sure. You can figure that out pretty easily by looking at your statement, and if not, you know, contacting your mortgage servicer and asking them, understanding, you'll know who the mortgage servicer are - is - and you can contact them by the Web or the phone and find out whether you might qualify for this.
NEARY: So, as I understand it, this means that Fannie Mae and Freddie Mac will take in less money in payments. Is that correct?
Mr. ZANDI: Yes. And the - you know, there is some risk. I mean, the reason why they want 20 percent equity, at least 20 percent down, is because that means you have real incentive not to default on your mortgage. And if they're going to take less equity, there's going to be more defaults. So, Fannie and Freddie - Fannie Mae and Freddie Mac will indeed not make as much money as a result of this.
NEARY: Well, will any taxpayer money be spent on this aspect of this plan?
Mr. ZANDI: Probably, although it's probably a pretty efficient way to use taxpayer dollars and to help people. I think Fannie Mae and Freddie Mac are pretty good at this, and nobody better to do it. And since Fannie Mae and Freddie Mac are now part of the national - or have been nationalized and are part of the federal government, they are taxpayer-owned, I think it makes sense to use them to help homeowners who are stressed.
NEARY: Now, the second part of the plan does, for sure, as I understand it, involve government money, and that would be creating incentives to help people modify the terms of subprime loans so that they won't have to default or go into foreclosure. Can you explain that for us?
Mr. ZANDI: Yes. So, if you now currently have a mortgage payment that is high relative to your income, let's say, it's 40 percent of your income, then under this plan, you can get your loan modified and have the mortgage payment reduced to as much as 31 percent of your income. The idea is that 31 percent of income is affordable, and you'll be able to make your mortgage payments and remain in your home and not in foreclosure. Now, of course, to do that, the government, taxpayers, will subsidize that reduction in interest rates necessary to move that homeowner from a 40-percent mortgage-payment-to-income ratio to 31 percent, so it will cost taxpayers money, but the hope is that will reduce the number foreclosures.
NEARY: So, it's worth the government investment in the hopes that - as you said, because then it might prevent foreclosures and that help...
Mr. ZANDI: Yes, I mean, the thing is that it helps everybody, because when someone goes into foreclosure and the home is sold into the market, it's sold at a much lower price, it drives down everyone's home value, and everyone's worth a lot less as a result of that. So, by using taxpayer dollars to try to keep these folks in their homes, it will reduce the number of foreclosures, it'll allow house prices to stabilize, at least in theory, and it will help everybody, everybody who is a homeowner.
NEARY: All right, let's see if we can get a call now. We're going to go to Gina, and she's calling from Palm Beach, Florida. Hi, Gina.
GINA (Caller): Hi.
NEARY: Go ahead.
GINA: Yes, I listened to the president, and the one thing that I would like to know, how about those that are self-employed and are under water with their mortgage, but cannot show fixed income? Is there any hope for - in my case, for example, I'm a real estate broker and I'm trying to remarket or renegotiate the loan, and I'm unable to because I don't have fixed income.
Mr. ZANDI: Yeah, I think - I would try. It's not clear, you know, exactly how this is all going to work. I mean, I think I would contact my mortgage servicer and go through my situation and see if I could qualify. You know, obviously, if your income does fluctuate a lot, it might be more difficult to get - I mean, for this modification plan. But I wouldn't rule it out and I certainly would try.
GINA: Thanks so much.
NEARY: All right. I hope that's helpful, Gina. An email here from Kaya(ph) in Sacramento. She says, is this package going to provide opportunities for people who are not in danger of foreclosure, per se, but would still greatly benefit from refinancing? I feel my husband and I are being punished for having our finances and priorities in order all along, while those who got into mortgages they could never afford or speculated on second and third homes are being bailed out.
Mr. ZANDI: Yeah, possibly. I mean, if there - if she has a conforming mortgage and she hasn't been able to refinance down into a lower interest rate because she doesn't have enough equity in the home, you know, of course, under the refinancing aspect of this plan, she could get her - get a new mortgage, refinance her mortgage into new one, and get a lower mortgage rate. So, I think there's a good opportunity for her if, in fact, she has a conforming loan. If she doesn't have a conforming loan, perhaps it is a subprime loan, then she may, in fact, benefit from - even if she's not in delinquency or default, she should contact her mortgage servicer. She may, in fact, qualify for the - for a modification under the other part of the plan.
NEARY: Well, the third part of this plan that we didn't go in doing great detail yet, it is aimed at keeping mortgage rates low for people who are trying to get new mortgages, and is that everybody? How does that work?
Mr. ZANDI: Well, on the - which part of planning you're referring to, Lynn?
NEARY: Well, as I understand it, the way the president described it in his speech that there is...
Mr. ZANDI: To bring down lower - to bring down...
Mr. ZANDI: Mortgage rates?
NEARY: Yes, bringing down mortgage rate.
Mr. ZANDI: I see, yeah, and this is an effort that's been underway for - already the Federal Reserve has been working hard through various mechanisms to try to bring down mortgage rates with some success. I mean, if you think back, oh, say, six months ago, the fixed mortgage rate on a 30-year loan was closer to six percent. Right now, it's a little over five percent, and that's largely or at least partially due to what the Federal Reserve has done. And they're going to be more of that and try to get mortgage rates well south of five percent, and of course, that would be very helpful. There is, in fact, a lot of mortgages out there, a lot of conforming mortgages, Fannie and Freddie mortgages, that have interest rates that are sitting around five and a half percent. So, if you get the fixed mortgage right down below five, they could easily refinance. So, that process will continue. The other thing that the plan has empowered - that has - is included in the plan is empowering Fanny Mae and Freddie Mac to go out and buy more mortgages and to create more mortgage credit. And that also will be helpful for people who are trying to refinance or even people who are trying to purchase the home. So, there's a number of different aspects to that, and you're right, one part of that is trying to get those rates down and try to get more credit out there for people.
NEARY: All right, we're going to go to Sinclair, who's calling from California - sorry - Florida. Hi, Sinclair.
SINCLAIR (Caller): Yes, hello. My question is not a whole lot of different from the lady that called and emailed, but I am self-employed, I am in Florida, and I have decent equity in my house, but over the last few years, my taxes and insurance have tripled, making, you know, my obligation a whole lot higher than it used to be. And I've done everything possible, and am doing everything possible, to make sure I make my payments and to pay my taxes and insurance. But in the meantime, I've been - my other expenses have been going on a credit card. So, it's just getting a lot harder for us, with the market being down, too, here. And I'll hang up with that. Thank you.
Mr. ZANDI: All right. Well, again, I think it'd be very worthwhile for you to contact your mortgage servicer and ask - and discussing your financial situation and see if, in fact, there is a mechanism for you to get your loan modified or depending on what loan it is - refinanced. When I mentioned one of other thing that's going on that might be important for people to know is that - there is a piece of legislation making its way through Congress that will make a change to the bankruptcy law. Under the current bankruptcy law you can't get your mortgage amount reduced, the amount of your first mortgage cannot be reduced in bankruptcy, but if this law is changed and there's a good chance that it will be, you can get the mortgage amount reduced, a judge can do that for you in a Chapter 13 filing. So, for a lot of people who are underwater - significantly underwater, it might make - and they have lots of other debt, credit card debt, student loans, auto loans, other things, it might make sense for them to think about, you know, a Chapter 13 bankruptcy that would be a way to reduce the amount of mortgage that they owe and also hold onto their home and get their other debts restructured. So, that isn't obviously for people who are in better in financial shape, but people who are really struggling that would be a possibility.
NEARY: And just for those who may not know, underwater means that your house - explain what underwater means.
Mr. ZANDI: Yeah, it means that the value of your home is less than the mortgage debt that you owe on your home. Obviously, that's not a very good place to be financially. In most cases - and in most times, that's not the case. The house prices generally rise, and you have some equity in your home. The value of your home is greater than the debt you owe, but given that house prices have collapsed in many parts of the country, they're down 30, 40, 50, percent from where they were three, four, years ago. Many people are underwater. The value of the home is now worth less than that's owed on the home and that's creating a great deal of problems.
NEARY: Mark Zandi is chief economist for Moody's Economy.com. And you are listening to Talk of the Nation from NPR News. All right, we're going to go to Patricia now, and Patricia is calling from Tucson, Arizona. Hi, Patricia.
PATRICIA (Caller): Hello?
NEARY: Hi, go ahead.
PATRICIA: Hi. I'm in Tucson, Arizona. I used to be in real estate. I'm not anymore. But here's what I think might be a fair answer. Do not reduce the amount of the loan they have, but change these loans to interest-only. That way, they're paying on interest, if they stay in the house long enough, they will recoup their investment and the total price of the house. That way, these people that have the invested - so they can make a fast buck, aren't getting bailed out at taxpayers' expense.
NEARY: Well, aren't our interest-only loans one of the ways that we all got into this problem the first place, Mark? I mean, isn't that considered not a particularly good way to go?
Mr. ZANDI: Yeah, I think you're right. A lot of the interest-only loans are now the loans that are having great deal of difficulty because you don't paid down principle and when the house falls in value then you're more likely to end up in this so-called negative equity or underwater position, and that's, you know, a bad place to be and that results in a lot of foreclosures. But I think, you know, broadly speaking, you know, I would agree with the caller that it isn't fair to pay down a principle on homeowners around homeowners that are speculators, people who invested in homes, looking for a quick buck, and none of these plans, not the president's plan and none of the other plans that are proposed or out there, really do that. Everyone does - is in agreement that investors should not get help under this...
NEARY: And is there a way to sort of figure that out? Is there a way to...
Mr. ZANDI: Yes, it's very straightforward...
Mr. ZANDI: And the mortgage owners know who is the investor and who's owner-occupied. And so, look, the president's plan, most other plans, only deal with people who actually live in the home.
NEARY: All right. We're going to take another call from Cologne(ph), I think it is, from California. Hi.
COLOGNE (Caller): Hello.
NEARY: Hi, go ahead.
COLOGNE: Yes, hi, my name is Cologne. I'm calling from the historic Sonora, California. I'm a first-time low-income home buyer through a HUD program here in the state of California. And I was laid off for about six weeks back in July, August, when the budget fiasco started to take place. Due to the type of employment that I have, my house went into foreclosure and was going to be sold on September 11th. I was able to scrape some money and try to save myself, but I am constantly in a one-month-behind payment process. My interest rate is in a pretty decent interest rate. I have, like, $100,000 worth of equity that I cannot tap into, and I'm constantly one month behind on my home payment. So, how is all this going to help me?
Mr. ZANDI: Yeah. You have $100,000 in equity in your home, and you can't find a lender that will give you a home equity line of credit or any other help?
COLOGNE: That's correct.
Mr. ZANDI: Now, is it a conforming mortgage, do you know? Oh, it's a HUD program? Well, I think under this plan - well, you know, what I would do? I would contact, you know, the FHA...
COLOGNE: I think.
Mr. ZANDI: And because they do have programs under the FHA when you have that amount of equity, they certainly can refinance you and refinance you up to 95 percent of the value of your home. And then that would allow you to take some of that equity out and get back on your financial foot, financial feedback, financial feedback.
COLOGNE: They declined me.
Mr. ZANDI: The FHA did?
Mr. ZANDI: Well, then something else is going on, right? So, maybe you don't have as much as equity as you're saying or there is some problem in your FICO score or...
NEARY: But is it possible that some of the changes that are coming in will help this - will help Cologne?
COLOGNE: Well, let me add this to the question because, yes, there's a FICO score there, but FICO score looks the way that it does, because of this predicament that I'm in.
Mr. ZANDI: I see, right. Well, you know, I'd give it another shot. You know, given the plan, given the intent of the plan to try to help as many people as possible, given that - you know, obviously you're earnest, you want to hold onto the home and you're working hard to do so. You know, I'd give it another shot. I'd call HUD. I'd call, you know, the FHA, and I would take another crack at it.
NEARY: All right, thanks so much for your call, Cologne. Just overall, what do you think, Mark? Do you think that this plan is going to work? Do you think it's going to help the economy? What's your sense of whether this is going to work?
Mr. ZANDI: Yeah, it's going to help. In the - all the elements of the plan are good. They move everyone in the right direction and it sends mortgage servicers and mortgage owners to modify and refinance loans and send to homeowner to try to make good on their mortgage payments and stay in their homes. All of the elements of the plan are good but if I had a criticism, it would be that it doesn't go far enough.
NEARY: All right. Thanks so much for joining us today, Mark.
Mr. ZANDI: Thank you.
NEARY: Mark Zandi is chief economist for Moody's Economy.com, and he spoke with us from his office in West Chester, Pennsylvania. Tomorrow, what is success in Afghanistan? We'll talk about the strategy to secure that country. This is Talk of the Nation from NPR News. I'm Lynn Neary in Washington.