The Bush Administration announced yesterday a new loan modification program in conjunction with 27 loan servicers, including Fannie Mae and Freddie Mac. This could enable mortgage relief (lower payments) for several hundred thousand homeowners who are at least three months delinquent on mortgages that are owned or guaranteed by Fannie Mae or Freddie Mac. Here’s how it can work:
- Lower the interest rate
- Stretch out the term of the loan to 40 years
- Lower the amount of the loan
- The underlying goal is that monthly payments should not exceed 38% of a family’s monthly income.
While the plan is certainly helpful, it isn’t as broad as the plan championed by the FDIC chairwoman, Sheila Bair. This is because the Bush administration plan focused on the Fannie and Freddie guaranteed loans, which are “conforming” loans (i.e., less risky vs. subprime loans). Bair’s plan had called for a $50BN government plan to modify loans.
I suppose one’s preference here depends on how far they believe the government should extend itself in terms of loan modifications. Regardless of your views here, based on President-elect Obama’s previous voting record on real estate or loan-related issues, I expect that a much broader loan modification program will work its way to Congress once the new term gets rolling in 2009.
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