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Home General News Mortgage Industry Articles Obama Unveils $275 Billion Plan to Shore Up Housing
Obama Unveils $275 Billion Plan to Shore Up Housing PDF Print E-mail
Written by By Alison Vekshin and Roger Runningen, Bloomber   

U.S. President Barack Obama pledged $275 billion to cut mortgage payments for as many as 9 million struggling homeowners and enable Fannie Mae and Freddie Mac to keep loan rates down.

The plan includes $75 billion to reduce monthly payments for borrowers, helps homeowners with loans owned or backed by Fannie Mae and Freddie Mac to refinance at lower rates and promises incentives to industry. Obama will double by $200 billion funding available for Fannie and Freddie to buy loans.

“It will give millions of families resigned to financial ruin a chance to rebuild,” Obama said today in Mesa, Arizona. “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

The program signals the Obama administration, which will release more details in two weeks, plans a more active stance to halt foreclosures than the Bush administration, which backed voluntary industry efforts. Record foreclosures in the past year are swelling the glut of properties on the market, forcing down home values and undermining homebuilders’ efforts to revive demand and lighten inventory by cutting prices.

“We tried voluntary, it didn’t work,” Federal Deposit Insurance Corp. Chairman Sheila Bair said today at a briefing in Mesa before Obama spoke. Bair has pressed the banking industry to accelerate loan modifications to keep people in their homes.

House Speaker Nancy Pelosi pledged to bolster Obama’s efforts by pushing foreclosure-prevention legislation, including a bill to let bankruptcy judges lower mortgage payments. Senator Charles Schumer, a New York Democrat, said the proposal should succeed where other efforts have failed.

‘Likely to Succeed’

“The fact that this plan focuses on all the players involved, including servicers and investors, and uses sticks as well as carrots, makes it far more likely to succeed than past proposals,” Schumer, a member of the Senate Banking Committee, said in a statement.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the Obama plan will help the bank expand its modification of mortgages. “The plan is good and strong, comprehensive and thoughtful,” Dimon said in an interview today. “I think it will be successful in modifying mortgages in a way that’s good for homeowners.”

U.S. builders broke ground in January on the fewest houses on record as a lack of credit and plunging sales exacerbated the worst real-estate slump in 75 years. Confidence among homebuilders barely rose in February from a record low, an industry index showed yesterday.

Bankruptcy Revamp

Obama said he will support revamping bankruptcy rules to let judges reduce mortgages on primary residences to fair-market value as long as borrowers pay their debts under a court-ordered plan. Treasury Secretary Timothy Geithner said the administration is in talks with Congress.

“Congress stands ready to complement the administration’s efforts by action on” pending legislation to enact the bankruptcy law changes, Pelosi said in a statement.

Pelosi said Congress also will act on legislation introduced last month by House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, to spur borrower and mortgage- industry participation in the Hope for Homeowners program.

The program, created last year and run by the Federal Housing Administration, was meant to reduce foreclosures by having the agency insure refinanced loans after holders agree to cut the mortgage principal.

Senator Richard Shelby of Alabama, the top Republican on the Banking Committee, said the plan is “nothing more than a lender bailout” that puts a burden on taxpayers. “The biggest outrage is that the president’s plan actually will use taxpayer money to pay people to do what they are already supposed to do -- pay their mortgage,” Shelby said in a statement.

$75 Billion

The Obama plan will use $75 billion, mostly from the $700 billion financial bailout fund, to match reductions lenders make in interest payments that lower borrowers’ payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent.

The plan is “an absolutely necessary part of the recovery” and will “arrest this very damaging spiral” in home prices, Geithner said. Details on putting the program into effect will be released March 4.

Treasury Shares Costs

Treasury will share the cost when lenders reduce monthly payments by forgiving a portion of the borrower’s mortgage balance, the government said. The program may help as many as 4 million borrowers, the administration said. The average borrower’s home value could be stabilized against a price decline by up to $6,000.

“We think it is accurately aimed at homeowners at risk that are most likely to represent avoidable foreclosures, so it is likely to have a maximum impact where the dollar is committed,” said Robert Davis, executive vice president of the American Bankers Association, in a telephone interview.

Banks accepting U.S. help must adopt loan modification plans, the government said.

Companies that service mortgages will get $1,000 for each modified loan, and as much as $1,000 annually for three years when the borrower stays current, the government said. Homeowners also are eligible for $1,000 annually for five years for remaining current on their loans, according to the plan. The cash will be applied to reducing the principal balance of the loan, according to a White House fact sheet.

Incentives

Mortgage servicers will get $500 and loan holders $1,500 to modify loans as an incentive for the industry to seek out borrowers at risk of falling behind on their payments.

“The Obama team is betting that if they can afford to stay in the home month-to-month, that borrower is not concerned about what today’s value of the home happens to be,”Howard Glaser, former counsel to the secretary of the U.S. Department of Housing and Urban Development, said today in a telephone interview. “I think that’s the right bet.”

Focusing on reducing the mortgage principal would have been a “prohibitively expensive proposition,” said Glaser, a Washington-based mortgage-industry analyst.

The plan will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, the president said. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, he said.

Fannie, Freddie

Treasury also raised the limit on the size of Fannie and Freddie’s retained mortgage portfolios by $50 billion, to $900 billion, allowed under the preferred stock purchase agreement included in the September federal takeover of the two mortgage- finance companies.

“It is an indication they are not looking at shuttering them to move their responsibilities elsewhere,” said James Vogel, a debt analyst with FTN Financial in Memphis, Tennessee, in an e- mailed statement. “That has been a widely discussed option.”

The multi-step plan to help homeowners with mortgages owned or guaranteed by Fannie and Freddie will apply to so-called conforming loans, which are limited to $625,500 in the most expensive real-estate markets and $417,000 everywhere else.

An administration official, speaking to reporters in Washington, said the Treasury’s pledge of support for Fannie and Freddie is intended to build confidence that the government stands fully behind the two mortgage-finance companies. The official said the two aren’t yet close to reaching the initial limit of $100 billion in government support.

$200 Billion

The additional $200 billion in funding will be made under a foreclosure-prevention law Congress enacted in July, the administration said.

A family with a conforming Fannie Mae or Freddie Mac mortgage will save an average of $2,300 annually under the program, HUD Secretary Shaun Donovan said at the Mesa briefing. Donovan added that he expects as many as 6 million foreclosures in the next three years if this program isn’t implemented.

The administration also plans to improve Hope for Homeowners and other Federal Housing Administration programs to modify and refinance mortgages at risk of foreclosure.

Banks including Citigroup Inc., JPMorgan, PNC Financial Services Group Inc. and Bank of America Corp. have agreed to suspend foreclosure proceedings until the Obama plan is adopted. The Office of Thrift Supervision last week urged the lenders it oversees to suspend foreclosures.

Insurance Plan

The administration and the FDIC developed a partial- guarantee initiative directing the Treasury to create a $10 billion insurance fund to discourage lenders from foreclosing on viable mortgages out of fear that prices will fall further, according to the fact sheet. Geithner said the $10 billion will come from the financial bailout fund.

Treasury also will develop loan-modification guidelines for the mortgage industry that will be used for the administration’s foreclosure-prevention plan, the government said.

“We are disappointed they didn’t take a more aggressive approach,” John Taylor, president of the National Community Reinvestment Coalition, said today in a telephone interview. “This is all still very voluntary. You really have to make this mandatory or purchase the loans if you are going to accomplish what you want.”

To contact the reporters on this story: Alison Vekshin in Washington at  This e-mail address is being protected from spambots. You need JavaScript enabled to view it Roger Runningen in Phoenix at  This e-mail address is being protected from spambots. You need JavaScript enabled to view it