Program would seek to bring mortgage payments down to 31% of income
By Ronald D. Orol, MarketWatch
Last update: 2:38 p.m. EST Feb. 18, 2009
WASHINGTON (MarketWatch) — The White House unveiled a plan Wednesday to help 9 million “at risk” homeowners modify their mortgages, committing $75 billion of taxpayer money to back the initiative.
The plan contains two separate programs. One program is aimed at 4 million to 5 million homeowners struggling with loans owned or guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE) to help them refinance their mortgages through the two institutions.
The Obama mortgage plan
Below is a list of key elements of the plan outlined Wednesday by President Obama that aims to aid as many as 9 million households in fending off foreclosures:
* Allows 4 million–5 million homeowners to refinance via government-sponsored mortgage giants Fannie Mae and Freddie Mac.
* Establishes $75 billion fund to reduce homeowners’ monthly payments.
* Develops uniform rules for loan modifications across the mortgage industry.
* Bolsters Fannie and Freddie by buying more of their shares.
* Allows Fannie and Freddie to hold $900 billion in mortgage-backed securities — a $50 billion increase.
A separate program would potentially help 3 million to 4 million additional homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.
“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in subprime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments,” President Barack Obama said.
Homeowners that have Fannie Mae or Freddie Mac loans, who are having a difficult time refinancing and owe more than 80% of the value of their homes, would be eligible to refinance with this program. Even if homeowners with Fannie or Freddie loans have negative equity on their mortgages, they can qualify for this refinancing program. The program would only help homeowners occupying the property, not individuals who own property as investors.
To help fund the program, the Treasury Department is hiking an existing funding commitment to Fannie Mae and Freddie Mac. It will buy $200 billion of Fannie and Freddie preferred stock, up from its previously preferred stock purchase agreement of $100 billion. It also will buy more mortgage securities backed by Fannie Mae and Freddie Mac, raising the total to $900 billion, up from $850 billion previously.
Fannie and Freddie own or guarantee more than 30 million mortgages, or almost 60% of all single-family loans, according to recent estimates.
Under the $75 billion modification program involving government subsidies to lenders, the lenders will be responsible for bringing down interest rates so that a borrower’s monthly mortgage payment is no more than 38% of pretax income. After that, the government program would match the amount reduced by the lender to bring a homeowner’s payments down to 31% of pretax income.
Should a lender have a difficult time getting a homeowner’s payment down to 31% of pretax income by lowering its interest rates, it can also lower the principal owed on the mortgage and take advantage of government assistance.
As part of the $75 billion initiative, servicers will receive $1,000 for each successful modification, as well as additional government funding for each month the borrower stays current on its loan. Homeowners can also receive $1,000 a year for five years as part of the program, as long as they stay current on their loan payments.
The program also provides additional incentives to lenders who modify at-risk loans before the borrower falls behind. The program takes effect March 4.
Loan servicers owned by financial institutions that receive government assistance from the remaining funds in the bank bailout bill would be required to implement “loan modification plans” based on Treasury guidance.
Henry Sommer, director at the National Association of Consumer Bankruptcy Attorneys, said he believes the incentives should encourage servicers to participate in the program. However, he added that even with the program, mortgage servicers may not have the staffing and resources to adjust a critical mass of troubled mortgages.
“It puts servicers in a better position to participate, but I still worry about staffing,” Sommer commented.
Obama traveled to a hard-hit Arizona community Wednesday to announce details of the program. He and Housing and Urban Development Secretary Shaun Donovan discussed their plan in Mesa, Ariz., a suburb of Phoenix that has been reeling from the housing-industry meltdown and economic slowdown.
Mesa — Arizona’s third-largest city — saw its median home price fall 35% over the past 12 months to $140,000 in January. More than 300 families lost their homes to foreclosure there in January.
For the $75 billion program, $50 billion will come from the remaining $350 billion in Troubled Asset Relief Program funds, and $25 billion will come from Fannie Mae and Freddie Mac, according to a Treasury official.
Obama plans to package this approach within a larger housing bill that lets bankruptcy judges alter mortgages and lower interest rates for troubled homeowners. Such a provision was approved by the House Judiciary Committee last month. House Speaker Nancy Pelosi, D-Calif., said “Congress stands ready” to act on the committee’s legislation.
Sommer said bankruptcy-judge authority would be the only way to provide serious help to troubled homeowners that have second loans. “These second lien loans were very prevalent in many problematic markets.”
Citigroup Inc. (C) has endorsed this approach, though other banks have yet to do so.
The new lower interest rate must be kept in place for five years. Leif Thomsen, chief executive of Boston-based mortgage lender Mortgage Master, said he believes that the government should make those lower interest rates permanent, but five years is better than a shorter period.
“A five-year modification is better than a six-month modification,” he commented.
Sommer also said he believed the Treasury’s time frame was set because government officials are hoping the financial system will stabilize by then.
The program also requires quarterly meetings to monitor the program among the Federal Deposit Insurance Corp., Housing and Urban Development Department and the Federal Reserve.
In another smaller, separate program to be announced Wednesday, funding of $1.5 billion would be provided to help renters displaced by foreclosure to relocate and $2 billion to stabilize neighborhoods that are experiencing high levels of foreclosure.