Obama Foreclosure Plan is Announced Today
Feb 18th, 2009 | By Rob | Category: housing
For the Americans who have already received a foreclosure notice, and the millions of additional families who are struggling to make their mortgage payments and save their home from foreclosure, the announcement of President Barack Obama’s foreclosure mitigation plan today will either go down in history as the first step in the solution to the housing crisis in the United States, or one more ineffective policy announcement from a federal government which can’t seem to stop foreclosure and arrest declining property values.
Less than a month into his presidency, Obama has been busy. He’s already signed a $787 billion economic stimulus package and set forth his plan for financial stability in the nation’s banking institutions. But the announcement of his housing solution today shows that he understands that he doesn’t have the time to celebrate his victories. The nation is facing rapidly increasing unemployment, a growing national budget deficit, trouble among America’s banks, a bankrupt auto industry, and declining real estate prices.
The Obama foreclosure prevention proposal is expected to throw everything, including the kitchen sink, at the mortgage mess.
Although the details of the Obama plan have remained a secret to the public, government officials have dropped hints and rumors have emerged about its contents in the past few weeks. The policy is expected to offer both carrots and sticks to loan servicers and investors in mortgage backed securities to encourage mortgage modification. For homeowners who have already received a foreclosure notice and those borrowers who are struggling to make their payments but have not yet entered the foreclosure process, it will offer a chance to save their home by reducing their monthly mortgage payment to an affordable amount.
To date, the government has relied primarily on voluntary incentives and self interest to induce investors and loan servicers to offer loan modifications to homeowners. The Hope for Homeowners program established last summer has failed to make a dent in the problem as lenders haven’t participated. Borrowers who have stopped making mortgage payments are faced with the intricacies of navigating each bank’s individual mortgage modification process. Borrowers who struggle to make their payments each month are told that they can’t be helped until they have stopped making payments (and, by extension, ruined their credit).
Both sets are at the mercy of a complex set of rules which determines the fate of their residence. They face loan servicers who are reluctant to modify mortgages for fear of litigation and investors who are reluctant to forgo foreclosure in favor of giving a homeowner a second chance. Even when they find a willing lender, a substantial decline in their property value or the loss of their employment may make a loan modification unworkable.
The Obama foreclosure plan will likely offer a uniform national standard for mortgage holders to apply to determine whether a home loan should be modified. Homeowners who meet an affordability and practicality test will have their monthly payment reduced to the range of 31% to 38% of their pretax income. In exchange for lower monthly payments and/or lower interest rates, borrowers may have to make payments for a longer period of time or give up some of the equity in their home if the real estate market rebounds.
The most likely carrot to induce loan holders to undertake the mortgage modification is a subsidy from the Federal Government. The government will pay the mortgage investors to cover a portion of their lost income from the modified loan. It is hoped that this payment will make it more costly to undertake foreclosure than to modify the home loan. The stick to encourage loan servicers and investors to participate in the program will lie with the bankruptcy court. If Congress gives bankruptcy judges the power to unilaterally modify the terms of a first mortgage, then lenders will have an incentive to work out a solution with their borrower rather than risk unfavorable terms from the use of a cramdown privision by a bankruptcy judge.
If the plan works, it could put a stop to the decline in real estate prices caused by fire sale foreclosures and abandoned homes. If it doesn’t, millions of Americans may discover what some have unfortunately already gone through.
I’ll have more commentary on the plan after it has been announced and I’ve had time to digest it.
