A few weeks ago on this blog, we talked about how a successful housing program would have to contain "carrots" and "sticks." Now that President Obama has presented his housing proposal, we see a variety of incentives and directives - the carrots and the sticks - laid out before us. His $275 plan, with 75 million coming from taxpayers and the balance in government commitments to back Fannie Mae and Freddie Mac, aims to help 9 million troubled homeowners, while absorbing some of the financial impact to both lenders and mortgage holders and promoting new homeownership.
Especially in comparison with the fragmented attempts to fix the housing problem over the past year, the plan offers a more integrated approach. Howard Glaser, a former HUD official during the Clinton administration, compared the new plan to a "howitzer" aimed at housing problems compared to the "squirt gun" efforts of the past. "They're throwing everything at it. It's not an incremental approach. It's the first thing on the table I think that has any chance of showing a path to the bottom of the housing market."
Specifically, the plan has four main thrusts:
- The plan that will remove restrictions that prevent Fannie Mae and Freddie Mac from refinancing homes where the mortgage exceeds the market value of the house.
- The plan offers lenders cash incentives to refinance subprime loans at affordable rates, for payments at not more than 31% of their income. The government will pay the difference between 31 and 38% of income. The lender would absorb losses on loans over 38.The plan will standardize the target payment for refinancing deals at 31% of the mortgage holder's income
- The government will help keep mortgage rates low by stabilizing the market through Treasury and the Federal Reserve purchase of Fannie Mae and Federal Reserve mortgage-backed securities
- The plan will also promote reforms that will help forestall foreclosures. Changes in the bankruptcy law will allow judges to reduce mortgages on primary residences so long as the homeowner follows the court-approved debt repayment plan. Meanwhile, communities will be encouraged to bid for competitive grants for developing innovative ways to prevent foreclosures.
Not everyone is thrilled with the plan. The plan offers no help to investors, owners of second or vacation homes they don't live in, or even owners who are renting out their homes on a temporary basis; the plan is directed toward owner-occupied principle residences. The President spoke of "responsible homeowners," which some investors took offense at; his plan was directed at "preventable foreclosures" of the primary homes that offer basic shelter to families.
Of the 9 million the plan aims to help, 4 million are on the brink of foreclosure or in the process while 5 million are in under-water situations where they owe more than the market value. For homeowners who are out of work, underemployed, or facing other financial issues, the plan will not be able to help them if they cannot pay a modified loan amount within program guidelines. For homeowners with negative equity, the plan may not help if the market value of the home is more than 105% of the loan. There are some mortgage holders in both groups who will lose their homes, while others will try to ride out either their personal circumstances or the fluctuation of the market in an effort to keep their homes.
Since part of the plan is directly funded by taxpayers, some homeowners are unhappy about subsidizing the bad decisions or financial misfortunes of their neighbors especially when many of them have other made sacrifices to pay their own mortgages or who are not too far from the brink of instability themselves. Obama tried to reassure Americans that the program will stabilize the system, a benefit everyone can enjoy - even those who receive no direct help.
The theory behind loan modification has always been that lenders will benefit more from keeping the homeowners in their home than in reclaiming the property. For lenders and loan servicers, the plan offers generous compensation for refinancing the loan but lenders must still agree to bring the loan down to 38% of the homeowner's income. Bankruptcy law changes in the plan are considered "partial cram-downs," as mortgage debt has always been outside the realm of the bankruptcy court. The plan does not force lenders to modify loans if they forego the incentive money.