This morning in Phoenix, President Barack Obama announced the third part of his economic recovery package, the Homeowner Affordability and Stability Plan, which will address the housing market and is particularly targeted at 7 to 9 million families facing foreclosure (there were 2.3 million foreclosures last year). Interestingly, the $200 billion in funding for the plan comes from the Housing and Economic Recovery Act passed last August, not TARP or the Financial Stability Plan. Here are the main points:
- There will be refinancing options for 4 to 5 million families whose mortgages are owned by Fannie Mae and Freddie Mac. Falling home prices have made many ineligible to refinance, but now even homeowners who own less than 20 percent of their home will be able to see lower interest rates and more manageable monthly payments.
- Use $75 billion to do loan modifications in the private market for 3 to 4 million at-risk homeowners. This looks to require tax payers to share some costs with lenders, who will be responsible for lowering interest rates on mortgages to a certain level (38 percent of the homeowner's income) and then costs will be matched with the government down to 31 percent. The government will also split the costs of a reduction in principal -- essentially, a write-down of the home's value. There are also incentive fees to mortgage servicers and holders for taking these write-downs, and a $10 billion insurance fund to encourage them to to modify their loans sooner rather than continuing to wait for prices to fall.
- The loan modification procedures will be standardized across all government mortgage holding agencies and all financial institutions participating in the program, preventing anyone from seizing a more advantageous deal.
- The administration will support the legislation that will allow judges to modify primary home loans during bankruptcy proceedings.
- Treasury is buying another $100 billion in preferred stock in both Fannie Mae and Freddie Mac in an attempt to increase confidence; the two government mortgage giants will also be increasing their loan portfolios "by $50 billion to $900 billion," which seems like a hell of a range of possibilities.
The difficulty of foreclosure prevention has always been that someone has to take a financial hit. The previous effort at dealing with the problem, HOPE for Homeowners, came out of last summer's housing legislation and failed because the program was entirely voluntary for mortgage lenders. The new plan obviously offers cost-sharing incentives for lenders (who will still face some initial loss) but also some coercive measures: One is the willingness of Fannie Mae and Freddie Mac to expand their market share and refinance their loans, which will affect the housing market across the board. The second is the administration's support for bankruptcy loan modification. Now the government is essentially presenting a choice for mortgage lenders: take our deal, which is standardized across the entire industry, or let a bankruptcy judge modify the loan however he or she sees fit. The president was also careful to present his plan in terms of the overall economic good, since many are still leery about bailing out homeowners who are defaulting on their loans, even if in many cases they were responsible and made their payments. The president stressed that foreclosures result in a drop in surrounding home value, and his fact sheet claims that "the average homeowner could see his or her home value stabilized against declines in price by as much as $6,000." So really, it's a rescue for everyone. Right? More reaction to the plan to come later in the day...
-- Tim Fernholz
