Obama Housing Plan Offers Mortgage Relief, Not Stock Market Bailout
Feb 21st, 2009 | By Rob | Category: featured, housing
President Obama announced his housing plan to avoid foreclosure of homeowners who are currently paying their mortgage but are not likely to be able to do so for long through little fault of their own. The program is also designed to stop foreclosure on homeowners who could afford a lower payment if they could get their mortgage refinanced at current market interest rates. The Obama housing plan is known as the Homeowner Affordability and Stability plan and is estimated to help 7 to 9 million people at a total cost of $275 billion.
For homeowners qualifying under the foreclosure plan, the federal government also will make payments of up to $1,000 a year for five years toward the homeowner. That’s a $5,000 reduction in the principal of a mortgage for simply making your mortgage payment on time every month for the next five years!
Unlike current programs to prevent foreclosure, the Obama housing plan doesn’t require that the homeowner be behind on their payments to enter the program. In my opinion, that’s the best part of the plan, since it will prevent the homeowner from being overwhelmed by their other debt when their credit is destroyed by missing mortgage payments.
Congressional approval is required for some portions of the plan, particularly the bankruptcy reform provision which gives bankruptcy judges the power to alter the mortgage of homeowners before them in bankruptcy proceedings. I’ve talked in depth about the cramdown provision previously and won’t go in to it extensively here.
The federal government intends to spend $275 billion on the foreclosure plan. $200 billion will go to Fannie Mae and Freddie Mac to give them additional capital to support writing and refinancing mortgages. $75 billion will be spent on the homeowners through incentives to lenders to undertake mortgage modification or incentive payments to reduce the principal balance of the home loan for homeowners under the plan who are paying their mortgage on time.
How do the specific provisions for homeowners work?
President Barack Obama’s housing plan is aimed at two groups of homeowners, those who cannot refinance their home because of the decline in their home value and those who simply cannot afford their mortgage payments.
Generally, mortgage lenders provide home loans for a certain percentage of the value of the home. With the decline in real estate values, homeowners can’t refinance their home’s mortgage at current market rates around 5% because their home won’t appraise for the value needed to pay off their current mortgage. The program allows homeowners with conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance for up to 105% of the value of their home.
The Obama plan is also concerned with lowering monthly mortgage payments to a level that the homeowner can afford. Homeowners can have their principal and interest lowered to 31% of their pretax income. This doesn’t reduce the amount of principal that the homeowner owes on the loan. In order to make up for the decrease in the monthly payment, the mortgage payment may be gradually increased after five years or the length of the loan may be extended. If the mortgage exceeds 55% of homeowner’s current income, they will have to take a debt management class.
What are the problems with the plan?
The plan has sparked a bailout revolt among some homeowners who are making their mortgage payments and did not overextend themeselves when buying their house. They argue that irresponsible homeowners are being rewarded for their bad decisions. While I understand the criticism, I think it also misses a few points. Many of the troubled mortgages were caused by unexpected events, including job losses, medical bills, divorce, or the complete collapse of the ability to sell a home or refinance due to real estate market declines. The mortgage madness took down some of the largest and most sophisticated banks in the world. How can we expect homeowners to have predicted the complete collapse of the credit market and prepared for it when almost no one else did?
The other problem with this line of criticism is that the foreclosure of these homeowners undermines the value of other homes in the area and makes refinancing difficult for responsible borrowers. When foreclosures are put back on the market at a low price, it drags down prices of other homes in the area and destroys homeowners’ equity.
The plan also does little to help the 5 million unemployed who have lost their income pay for their housing. In the economic stimulus legislation, the government finally recognized the need for subsidized health insurance for those receiving unemployment. Shouldn’t the government take into account your monthly mortgage payment or apartment cost when determining how much you should receive on unemployment?
I’m also disappointed (of course) that the Obama administration didn’t announce measures to help homeowners with the additional debt in their life. If the government is addressing one debt drain on society, shouldn’t it address the other at the same time? Homeowners who receive mortgage modifications through the housing plan should also have their credit card debt taken care of at the same time. Otherwise, these homeowners may see themselves back in trouble as credit card issues come to the forefront.
The government is also still working out one of the most important aspect of the housing plan: how to determine who will qualify. That is a critical question because it is one of the hardest aspects of the plan. The government will walk a fine line between rejecting those homeowners who do not need a bailout and rejecting homeowners who couldn’t save their home from foreclosure even if helped by the plan. If this detail hasn’t been worked out, then the Obama mortgage bailout is still in flux.
In the wake of the announcement of the Obama housing plan, the market declined to test its lowest levels in ten years. Stock investors don’t have faith that the financial and real estate stabilization efforts will save the banks from nationalization by the government and boost the housing market. The Obama mortgage bailout simply didn’t get as much traction among the investment community as the announcement of the bank bailout plan by Hank Paulson or the appointment of Timothy Geithner for Treasury Secretary by then President-elect Obama. If investors don’t have faith that the mortgage plan will work, then why should we?
Further details about the program are expected before its start on March 4, 2009. If you need help with a mortgage modification or foreclosure in the meantime, please fill out this form to be contacted.
