Finance Globe

U.S. financial and economic topics from several finance writers.
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Obama Announces Plan to Recover from Housing Crisis

President Obama has said that it will take a three-legged stool to fix the nation's economic troubles.

Last week, Treasury Secretary Timothy Geithner unveiled the Financial Stability Plan - a measure to prop up the nation's banking system and get credit flowing again so that businesses and consumers can begin spending normally again to support the economy.

The economic stimulus package known as the American Recovery and Reinvestment Act 2009 was signed by Obama on Tuesday in Denver. "We must stem the spread of foreclosures and falling home values for all Americans, and do everything we can to help responsible homeowners stay in their homes," he said yesterday as he signed the $787 billion package into law.

And in Mesa, Arizona today, Obama introduced the government's plan to help responsible homeowners keep their homes with the $75 billion Homeowner Affordability and Stability Plan - the third of those legs in that economy-supporting stool. Communities all across the country have been deeply affected by the crisis, but Arizona is one of the states hit particularly hard by the housing bust.

"In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to continue to deepen," Obama said. "But if we act boldly and swiftly to arrest this downward spiral, every American will benefit."

He laid out the four key elements of the Homeowner Affordability and Stability Plan:
  • refinancing help for four to five million homeowners whose mortgages are owned by or guaranteed through Fannie Mae or Freddie Mac
  • new incentives for lenders to modify the terms of sub-prime loans at risk of default and foreclosure
  • steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages
  • additional reforms designed to help families stay in their homes
"The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly," the President said, "by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments."

"But I want to be very clear about what this plan will not do," Obama continued. "It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. It will not help dishonest lenders who acted irresponsibly, distorting the facts and dismissing the fine print at the expense of buyers who didn't know better. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford. So I just want to make this clear: This plan will not save every home."

Reducing the rate of foreclosure will help all homeowners, whether they can afford their mortgage or not. The White House said that some studies show responsible homeowners may lose as much as 9% of the value of their home simply because a neighboring home goes into foreclosure.

Refinancing help for homeowners with Freddie or Fannie mortgages
The plan recognizes that many responsible homeowners who are current on their mortgage would like to refinance at today's lower rates, but cannot do so because falling home prices have wiped out their home's equity. They may even owe more than their house is now worth - what is known as being "upside down" or "underwater" on the mortgage.

Even homeowners who made a significant down payment may have seen their home's value fall to a level where they owe too much to qualify for a refinance - loans owned or guaranteed by the two Government-Sponsored Enterprises (GSEs) generally cannot be refinanced for more than 80% of home's value.

To help alleviate this unfortunate situation, homeowners who have a conventional mortgage owned or guaranteed by Freddie or Fannie may be allowed to refinance with a loan-to-value ratio of up to 105% of the home's current market value. The plan is estimated to help four to five million homeowners who are underwater on their current mortgage due to falling home values.

Homeowners who refinance under this plan can take a fixed-rate loan with a term of fifteen or thirty years. Refinancing can save a homeowner several thousand dollars a year in interest charges, depending on the size of the loan and the difference between the original mortgage rate and the refinance rate.

Help for troubled homeowners facing foreclosure

The plan also helps troubled homeowners who may soon face foreclosure by helping lenders work with homeowners to lower payments on their mortgages. Homeowners who have already missed payments and homeowners who haven't yet missed payments but are struggling financially may benefit from a loan modification under the plan.

Sub-prime loans only make up about 12% of all home loans, but they account for roughly half of all foreclosures. The plan establishes guidelines for the mortgage industry to encourage lenders to modify mortgages on primary residences. "Any institution that wishes to receive financial assistance from the government, from taxpayers, and to modify home mortgages, will have to do so according to these guidelines," Obama said.

Lenders who participate will be required to reduce the mortgage payment to no more than 31% of the homeowner's monthly income. Lenders may choose to reduce the payment by reducing the principal, but it is much more likely that they will reduce the interest rate instead. The president said that as many as three to four million homeowners can benefit from this plan.

Homeowners can find out if they're eligible to participate in the program by calling their mortgage lender after March 4, which is when the details of the program will be announced. The government advises homeowners to be patient if they don't get through right away, as lenders are expected to receive calls in heavy volume once the plan becomes available to the public.

In the meantime, homeowners who are interested in participating can begin to collect the documents that will be needed for their lender to refinance - recent paystubs for all borrowers on the mortgage, last year's tax return, information on any second mortgages, and monthly payments on other debts such as credit cards, car loans, student loans, or any other revolving debt or installment loans.

Lenders are not required to participate in the program, but the government expects that most lenders will voluntarily agree due to the attractive incentives they will get for doing so.

Keeping interest rates low for buyers looking to secure new mortgages

Most new home mortgages are bought or backed by Freddie or Fannie. The role of the GSEs is to provide liquidity to the mortgage market and help to keep interest rates low for middle-class families.

The Treasury Department and the Federal Reserve will continue to purchase mortgage-backed securities from the GSEs to keep liquidity flowing in the mortgage market. The Treasury will provide up to $200 billion in capital to ensure that Fannie and Freddie can continue to play their vital role in keeping mortgages affordable and available for homebuyers.

"And we're also going to work with Fannie and Freddie on other strategies to bolster the mortgage markets, like working with state housing finance agencies to increase their liquidity," Obama said. "And as we seek to ensure that these institutions continue to perform what is a vital function on behalf of middle-class families, we also need to maintain transparency and strong oversight so that they do so in responsible and effective ways."

Additional reforms
Obama also said that his administration will continue to support bankruptcy reform to allow judges to reduce home mortgages on primary residences to their fair market value, as long as borrowers meet their debt-payments under court ordered plans. "I just want everybody to understand, that's the rule for investors who own two, three, and four homes," Obama said. "So it should be the rule for folks who just own one home - as an alternative to foreclosure."

As part of the recovery plan Obama signed into law on Tuesday, $2 billion in competitive grants will be awarded to communities that "are bringing together stakeholders and testing new and innovative ways to limit the effects of foreclosures," he said. "Communities have shown a lot of initiative, taking responsibility for this crisis when many others have not. And supporting these neighborhood efforts is exactly what we should be doing."

Obama said, "Our housing crisis was born of eroding home values, but it was also an erosion of our common values, and in some case, common sense. It was brought about by big banks that traded in risky mortgages in return for profits that were literally too good to be true; by lenders who knowingly took advantage of homebuyers; by homebuyers who knowingly borrowed too much from lenders; by speculators who gambled on ever-rising prices; and by leaders in our nation's capital who failed to act amidst a deepening crisis."

"So solving this crisis will require more than resources; it will require all of us to step back and take responsibility. Government has to take responsibility for setting rules of the road that are fair and fairly enforced," he continued. "Banks and lenders must be held accountable for ending the practices that got us into this crisis in the first place. And each of us, as individuals, have to take responsibility for their own actions."

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Tuesday, 22 June 2021

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