Treasury Secretary Timothy Geithner released details of the Obama administration’s housing rescue plan yesterday and markets responded favorably to the news. The “Making Home Affordable” plan will assist as many as 9 million homeowners to prevent foreclosure. The plan provides cash incentives to borrowers and lenders, and attempts to forestall foreclosures through modifications of mortgages by taking advantage of lower rates. The plan applies to first lien mortgages with a principal balance up to $729,750.
In announcing the plan, Secretary Geithner said, “It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive. Economic recovery requires action on all three fronts.”
The “Home Affordable Refinance” program will target the 4 to 5 million homeowners who have a solid payment history on an existing home mortgage owned by Fannie Mae or Freddie Mac. The program seeks to help homeowners who have seen the value of their homes drop to the point where they are unable to take advantage of lower interest rates. The program will work to reduce monthly mortgage payments through low-cost refinancing.
The “Home Affordable Modification” program is the heart of the Obama administration’s efforts to address the foreclosure crisis. The $75 billion plan aims to assist up to 4 million homeowners who are at risk of losing their homes. The loans must have originated on or before January 1 of this year. The program will end in December 2012 and loans can only be modified once under the program. The program seeks to help homeowners who are struggling to make their monthly mortgage payments because of the current recession but cannot sell their homes because housing prices have fallen sharply. The program will offer homeowners a chance to stay in their homes by reducing their monthly mortgage payments. It will bring together lenders, investors, loan servicers, borrowers and the federal government so that all parties share in the cost of making sure homeowners can afford their monthly payments.
Under the mortgage modification program, the Treasury Department will partner with financial institutions and investors to reduce homeowners’ monthly mortgage payments. Lenders will first reduce a homeowner’s monthly payments to a specified affordability level. The program will then match further reductions in monthly payments dollar-for-dollar, from 38% down to 31% debt-to-income ratio for the borrower. The latter is the proportion of a borrower’s income that is used to service their debt. The modified payments will be kept in place for five years and the loan rate will be capped for the life of the loan. To reach the target affordability level of 31% interest payments will be reduced to as low as 2 percent. The Treasury Department will share the cost of reducing mortgage payments to the 31% debt-to-income ratio.
The program will also have incentives built in to award homeowners who keep current with their payments and lenders who successfully help borrowers. Loan servicers will receive $1,000 up-front for each eligible loan modification that meets the program’s guidelines. The plan will also include an incentive payment of $1,500 to mortgage holders and $500 for servicers for modifications made while a borrower at risk of imminent default is still current on their payments. In addition, as long as the borrower stays current on his or her payments, he or she can get up to $1,000 each year for five years.
The Treasury Department will also work with the Federal Deposit Insurance Corporation (FDIC) to encourage loan modifications in the face of declining home prices. Treasury will make payments up to $10 billion to discourage lenders, servicers, and investors from foreclosing on mortgages that could be viable but out of fear that home prices will fall even further in the future. The payments are meant to offset investor losses due to declines in home prices. Holders of mortgages will be provided an additional payment on each modified loan, linked to declines in the home price index.
The administration is attempting to curb foreclosures at a time when whole communities are being affected by the housing crisis. The Department of Housing and Urban Development (HUD) will also make funds available to not-for-profit agencies that provide counseling services. To be eligible for assistance under the program borrowers with high debt-to-income levels must agree to use counseling services.
The administration will also seek changes to bankruptcy procedures by proposing judicial modifications of home mortgages. Under the proposal, homeowners who have run out of options would be able to implement a responsible plan to pay their debts. A bankruptcy judge would be able to reduce the outstanding principal of a primary residence, home mortgage loan to current fair market value when a person has no other options.
As much as the recently passed economic stimulus package is being counted upon to put Americans back to work, the President’s plan to address the housing crisis has been much anticipated to halt the foreclosure crisis. The mortgage crisis fueled the economic downturn and foreclosures continue to destabilize communities across the country. While the financial markets have not responded favorably to the economic stimulus package, there were signs yesterday that the administration’s housing plan was well received by investors. The challenge will be to put the plan in action quickly as millions of homeowners are at risk of defaulting on their mortgages. Despite the breadth of the plan, many economists question whether it will be enough to address the housing crisis as it does not address the millions of homeowners who have lost their jobs and are simply unable to afford their mortgage payments.