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Mortgage plan aims to stanch home loss

Foreclosure prevention at center of proposal

MESA, Ariz. – President Barack Obama unveiled a $75 billion foreclosure prevention program Wednesday aimed at arresting one of the root causes of the nation’s economic spiral by helping as many as 9 million homeowners obtain more affordable mortgage terms.

The program, part of the Obama administration’s multitrillion dollar effort to jolt the nation out of its deepening recession, went beyond what some analysts had anticipated and was welcomed by many of the nation’s top lending institutions. But it also drew criticism from some housing experts and consumer advocates, who argued it did not go far enough in addressing some critical aspects of the foreclosure crisis. Many key details of the plan will not be released until early next month.

Speaking to a crowd packed into a high school gymnasium in Mesa, Obama said the mortgage plan would help all those confronted with rapidly eroding home values by helping those in danger of losing their homes.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it,” Obama said.

The three key elements of the proposal include a program to refinance 4 million to 5 million homeowners with little equity in their home into cheaper mortgages; a $75 billion program to keep 3 million to 4 million homeowners out of foreclosure; and doubling the size of the government’s commitment to Fannie Mae and Freddie Mac to $400 billion.

It is the largest federal foreclosure prevention measure in decades, relying on a series of incentives to jump-start fledgling efforts to keep millions of distressed borrowers in their homes. It is also the first major government program aimed at homeowners who are still current on their loans and will require large banks that have received government bailout funds to abide by industry standards for loan modifications established by the Obama administration.

About one in 10 homeowners were delinquent on their mortgages late last year and as many as 6 million homes could go into foreclosure during the next three years without this program, said Shaun Donovan, secretary of housing and urban development, adding: “We believe we can help a very large share of these.”

The administration estimates that the plan could stop the slide in home prices by up to $6,000 per home simply by reducing foreclosures.

“The effects of this crisis have also reverberated across the financial markets. When the housing market collapsed, so did the availability of credit on which our economy depends,” Obama said. “As that credit has dried up, it has been harder for families to find affordable loans to purchase a car or pay tuition and harder for businesses to secure the capital they need to expand and create jobs.”

While some of the measures announced by Obama can be implemented by government regulators, other parts will require congressional approval. A key part of the administration’s package includes legislation changing bankruptcy law to allow judges to modify the mortgages of distressed homeowners, including by reducing the principal of the loan to the property’s current market value.

The program does not tackle some key issues, critics said, pointing to the fact that it does not include a plan for dealing with second mortgages, which often develop into a stumbling block for mortgage modification programs. Others noted that for many lenders, the program would be voluntary.

Nor does the plan require lenders to lower the principal owed by homeowners whose home values have fallen below what they owe on their mortgage, known as being “underwater.” Those homeowners are among the most likely to go into foreclosure.

The modification program also does not fully deal with the millions of loans sold into securitized pools, known as private label securities, making them difficult to modify, financial service industry officials said. There was also concern from some mortgage industry analysts that the plan focuses only on owner-occupied homes, and not investors – who accounted for as many as 40 percent of home sales during the peak of the housing bubble.

Administration officials said they tried to provide enough help to stem foreclosures without rewarding borrowers who purposefully stop paying or helping people with the financial resources to help themselves. Obama’s team wanted to risk only as much taxpayer money as absolutely necessary, they said.

A key part of the program would loosen lending standards at Fannie Mae and Freddie Mac to allow millions of homeowners to qualify for a refinanced loans and take advantage of the opportunity to refinance at a time of historically low mortgage rates. Many homeowners don’t qualify for refinancing because the level of equity in their homes has not reached 20 percent.

Under the program, homeowners would be eligible to refinance as long as their mortgage does not exceed 105 percent of the current value of the property. For example, if the value of the borrower’s property is $200,000, but the homeowner owes $210,000, he or she could still qualify for the program.