Obama's Mortgage Foreclosure Mitigation Plan

As this blog has noted in the past (here, here, here and here), the federal government has made several attempts at stemming the tide of foreclosures in the United States.  Most of them have relied on the industry to take the lead as in the HOPE Now Alliance, and the FDIC's loan modification "in a box" program.  Now, the Obama Administration takes its shot with the Homeowner Affordability and Stability Plan, announced on February 18th by President Obama.

The Obama plan also relies on lenders actively pursuing modifications, but now offers government incentives (i.e. money) to encourage lenders to modify more mortgages on primary residences, and thereby reduce foreclosures.  The plan, which will take effect on March 4, 2009, consists of the following aspects:

(1) A loan modification plan for homeowners who are at risk of default and foreclosure:

The plan offers financial incentives to lenders to modify first mortgages for primary residences for borrowers whose mortgage payments exceed 31% of current household gross income, if the amount of the loans does not exceed the current limits for Fannie Mae and Freddie Mac. Lenders will be first required to reduce monthly payments to no more than 38% of borrowers' gross monthly income. This reduction is to be made primarily by an adjustment of the interest rate, although the plan offers incentives to lenders for principal reductions. Lenders and the government will share the cost of reducing monthly payments to 31% of gross income. If homeowners pay on time for five years, by the end of that time they can receive up to $5,000 to reduce their principal balances. Bonuses will be given to mortgage servicers and lenders if they complete modifications when homeowners are still current with payments. 

(2) A refinancing program for homeowners who are current with mortgage payments but
owe more than their homes are currently worth:

Fannie Mae and Freddie Mac will be permitted to purchase new first mortgage loans of up to 105% of the current market value of properties, allowing homeowners to take advantage of historically low interest rates by refinancing existing debt, thus reducing monthly payments.

(3) Additional capitalization of Fannie Mae and Freddie Mac to keep money available for new mortgages:

Using money authorized in the Housing and Economic Recovery Act, the Treasury Department will increase its Preferred Stock Purchase Agreements with Fannie Mae and Freddie Mac to $200 billion each and will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities. The administration believes this move will stabilize markets and keep mortgage rates low.

(4) Some additional provisions:

• The administration is developing uniform guidelines for loan modifications (using guidelines developed by FDIC as a starting point), which will be used by all lenders receiving financial assistance under the financial stability plan and Fannie Mae and Freddie Mac. The guidelines are expected to be released on or before March 4.

• The administration will seek changes in bankruptcy laws to allow judges to reduce the mortgage principal of homeownersin bankruptcy. To encourage lenders to modify loans (rather than foreclosing now out of fear that the values of properties will continue to decline), the Treasury Department will establish a $10 billion insurance fund. The fund will partially compensate lenders if housing values fall further, and there is a subsequent default.

Experts forecast that, when the Homeowner Affordability and Stability Plan goes into effect on March 4, financial institutions may become deluged with requests to restructure loans.  The problem is made more daunting when the homeowner desiring a loan modification is in foreclosure because the lender's foreclosure department is typically different from the department charged with modifying loans.

Lenders may find it more manageable to contract out this loan modification work.  Several firms, including my firm (Reinhart Boerner Van Deuren) have formed teams to assist with issues arising from the President's stimulus bill and the Homeowner Affordability and Stability Plan.

For the official documentation supporting this plan, click on the following government links:

http://www.treas.gov/initiatives/eesa/homeowner-affordability-plan/ExecutiveSummary.pdf
http://www.ustreas.gov/news/index2.html
http://www.ustreas.gov/news/index3.html

Comments

[Melvin Plontz]

"Fannie Mae and Freddie Mac will be permitted to purchase new first mortgage loans of up to 105% of the current market value of properties, allowing homeowners to take advantage of historically low interest rates by refinancing existing debt, thus reducing monthly payments."

I can only speak for South Florida - but the 105% does not work here, where for about 3 years running, property values have been declining in the double digit percentages.

On the other hand, I have yet to see a good analysis of the forecast impact of expanding cram-downs to primary residence mortgages - but the benefit that will be to homeowners will probably be offset (more than offset?) by the lending institutions it takes down.

[Anna K. Larson]

We, at LegalMatch.com, are encouraged that the FTC has recently implemented a new crackdown on foreclosure equity and loan modification scams, particularly those firms that have leveraged the "Hope Now" Alliance name. We've literally had an explosion of requests from our customers during the past 12 months asking for experienced attorneys to assist them with the foreclosure process.

[Steve Dye]

Looks like I followed one of your posts. I find this plan a bit late but still worth a try...

Steve Dye We Buy Nor Cal Homes