President Obama announced a $275 billion plan that would help homeowners, as many as 9 million, refinance or re-negotiate their home loans.
Said President Obama “This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild…It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”
There are three parts to the plan:
1) Help homeowners that keep up with their payments but have high interest mortgages and cannot re-finance due to lack of equity in their homes
2) Provide incentives to lenders to change loan terms for troubled borrowers
3) Increase mortgage credit available by giving $200 billion in financial backing to Freddie Mac and Fannie Mae.
There is also a provision that, if approved by Congress, would allow bankruptcy judges to change the terms of mortgages to lower payments. This is controversial as lenders fear it will turn away mortgage investors.
About $75 billion will go towards programs to subsidize loan changes to bring a family’s mortgage payment to 31% of the gross income. This will be achieved with incentives to lenders from the government.
Let’s look at a couple of charts that show how this program will work:
Notice that for responsible borrowers they must have a loan backed/owned either by Fannie Mae or Freddie Mac. The plan doesn’t apply to private loans.
For “at risk” borrowers the home must be your primary residence and the loan cannot exceed certain limits.
The plan is set to take effect March 4th. The President has power to enact all parts except the portion that allows bankruptcy judges to change mortgage terms. That needs to be approved by Congress.
I’m a little torn over this. On the one hand, job losses are on the rise as a result of the economy and people who made reasonable home purchases are having trouble making payments. For these people I think this is really great.
But on the other hand, there were many who bought too much house and did so with unfavorable mortgage terms. I’m not sure I feel as sorry for these people as they bit off more than they could chew in the first place. Should the government be stepping in to help these borrowers? Doesn’t this, in part, hurt a future borrower like my wife and me who have been squirreling away our savings so we have enough of a down payment to own a home?
I guess we have to take the good with some bad in this case in order to help stabilize the economy.
How do you feel about the President’s Housing Crisis plan?
Sources: $275 Plan Seeks to Address Housing Crisis, The New housing Plan
{ 8 comments… read them below or add one }
I’m also torn on the whole thing. I don’t like the idea of any principal forgiveness or having a court be able to adjust terms of the loan. It should be between the bank and borrower. But something should be done.
It’s odd to me that the banks won’t modify the loans on their own. I mean, wouldn’t they rather modify than have a bunch of houses foreclose? Perhaps they were “banking” on the government giving them money to modify.
Ashley @ Wide Open Wallet’s last blog post..Interview with Mrs. Money
@ Ashley – Wouldn’t surprise me if the banks knew it would eventually happen. Even with all of the foreclosures they still rake in a lot with all of their other mortgages. Could it be worth it to them to let a house foreclose under some circumstances? I also wouldn’t be surprised if many people let their houses foreclose just to get out of the payment.
I think principal forgiveness is a bad precedent. If you bought expecting prices to keep rising when they were already astronomical then that’s foolish. I’m real happy prices are returning to normal and I might actually be able to afford a house!
Like Ashley, I’m confused that the mortgage lenders aren’t chomping at the bit for loan modification — especially the version where they extend the term of the loan. I mean, they could make a killing but making payments affordable for borrowers — and then having them pay for 40 or 50 years.
ANYWAY, with my home value dropping, and the fact that I bought a home in 2007, I love that I could probably refinance, since we owe about 90% of our home’s value. If we could refinance to a 15-year loan at 4.81% under this plan, we’d be doing the happy dance. Build equity and pay only a little bit more than we are right now. We’d save a ton in the long run.
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@ Miranda – I hope you can get a refinance!
@ PT – If you have that much equity in your home then you shouldn’t have the hard time that many who are affected by layoffs with less equity are having. I don’t think this is meant to exclude you (unless your loan isn’t Fannie or Freddie backed).
So, the way I’m understanding it is that if you’ve paid more than 20% down on your home you can’t qualify for any of this??
Basically, because I’m responsible and did things the right way, I’m screwed and can’t get my rate adjusted?
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I’m torn on this too. We decided to do things “right” and put the 20% down and since it’s impossible to do that in our market (San Francisco Bay Area) we declined to buy a home right away.
I figure we should be the one to get some assistance with buying our first home. Instead, we have to pay for the errors in judgment and greed by others.
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@ Carla – It does leave a bad example and incentive for people to be as greedy as possible and hope to get bailed out. Hopefully this helps more people who are just stuck do to layoffs than people who leveraged for too much house at bad rates. We’ve been waiting too to buy because we knew we weren’t ready financially.
well I hope this plan will work even a bit, at least it is one of the last choice we could ask for, many of our companies here are affected also with this crisis a lot of people here are out of jobs, many houses are being abandoned so at least this could help some.
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