|
President Announces Homeowner Affordability and Stability Plan
by Mike Wallace
One day after signing the $787 billion economic recovery package into law, President Obama announced the most expansive federal effort to date to address the current foreclosure crisis that many believe is the root cause of the economic downturn. The President, joined by Treasury Secretary Tim Geithner and Housing and Urban Development Secretary Shaun Donovan, outlined the “Homeowner Affordability and Stability Plan” that could help 7 to 9 million families reduce their monthly mortgage payments to affordable levels.
The new plan has three major components. First, the government will refinance up to five million mortgages held by Fannie Mae or Freddie Mac, the two mortgage finance giants that were placed under federal receivership last year due to safety and soundness concerns in the faltering mortgage market.
Second, the U.S. Treasury will commit $75 billion to a Homeowner Stability Initiative to reduce monthly mortgage payments for families with loans held by entities other than Fannie Mae or Freddie Mac. Third, the government will take steps to lower mortgage rates overall by increasing its commitment to purchase mortgage-backed securities and preferred stock from Fannie Mae and Freddie Mac, which could further thaw frozen credit markets.
The plan follows several other federal efforts to prevent foreclosures that failed to achieve large-scale mortgage modifications, most notably, the Hope for Homeowners program, which was enacted last year to help up to 400,000 families modify their mortgages.
To date, the Federal Housing Administration has modified an anemic 25 loans under the program. A major stumbling block has been mortgage servicers, who collect monthly mortgage payments from homeowners on behalf of investors in mortgage-backed securities. Because servicers are responsible to the investors, they have had little incentive to modify mortgage loans because a reduction in monthly payments would result in a reduction of returns for the investors.
The Homeowner Affordability and Stability Plan would directly incentivize mortgage modifications by paying $1,000 for each eligible modification. Lenders would also be eligible for monthly fees of up to $1,000 per year, as long as a modified loan borrower stays current.
Also, unlike previous mortgage modification efforts, this plan is not completely voluntary. Any financial institution that receives capital from the second round of funding under the Troubled Assets Relief Program would be required to participate in the new programs and implement stronger loan modification guidelines.
The most controversial part of the plan would still require Congressional approval. The President is urging Congress to pass mortgage “cramdown” legislation, which would permit bankruptcy judges to modify mortgages on principal residences. The House Judiciary Committee recently passed H.R. 200, the Helping Families Save Their Homes in Bankruptcy Act of 2009, which is strongly opposed by many in the financial services industry. House Financial Services Chairman Barney Frank (D-Mass.) and Senate Banking Chairman Chris Dodd (D-Conn.) are both expected to introduce broader housing measures soon that would include the Judiciary passed bill.
Specific guidelines for what mortgages would be eligible for assistance under the new plan have not yet been released, but Treasury officials are working with other federal regulators, including the FDIC, and mortgage providers to develop guidelines that result in widespread adoption across the industry.
|