How The Obama Mortgage Plan Works
MICHELE NORRIS, Host:
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.
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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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