President Obama last week unveiled details of a $75 billion foreclosure prevention plan designed to help seven to nine million “responsible” home owners remain in their homes with affordable mortgage payments. The official rollout date for the program is March 4.
“We applaud the Obama Administration for unveiling its plan to stem the rising tide of foreclosures that is flooding the market with excess inventory and undermining overall home values,” said NAHB Chairman Joe Robson. “This is an important first step to address the acute supply problems confronting the housing market.”
The plan has three main components:
A refinancing program for borrowers of mortgages held or guaranteed by Fannie Mae and Freddie Mac who are current on their mortgage payments but who have been unable to refinance because the value of their home has declined
A mortgage modification program for borrowers in default, or at imminent risk of default, that builds on the model established by the Federal Deposit Insurance Corporation by expanding eligibility and establishing incentives for borrowers, mortgage holders and servicers
Actions to bolster the financial stability and mortgage support capacity of Fannie Mae and Freddie Mac
Of particular interest to NAHB are provisions that relate to mortgage loan modifications for primary residences.
“We hope this will focus only on those mortgages responsible for the surge in defaults,” said Robson, adding that NAHB looks forward to working with the Administration and Congress to ensure that any legislative change is done in a careful manner that will have a positive impact on the marketplace.
The Administration believes its plan will enable Fannie Mae and Freddie Mac to refinance four million to five million home owners. Currently, these institutions have rules that make it difficult to refinance mortgages valued at more than 80% of the home’s worth.
For example, on a home valued at $300,000 with a mortgage of $270,000, a home owner might have trouble refinancing through Fannie Mae and Freddie Mac. The Administration will remove limitations on Fannie and Freddie so that they can refinance mortgages they already own or guarantee.
The plan would create new incentives for lenders to work with borrowers to modify the terms of loans at risk of default or foreclosure. This would require both borrowers and lenders to do their part. Lenders would be required to reduce payments to no more than 38% of a borrower’s income. The government would provide a subsidy to help further cut the borrower’s mortgage debt-to-income ratio to 31%.
To encourage lender participation in the program, the plan provides them with additional financial incentives to modify loans prior to default.
The program also encourages borrowers to stay current on their payments. Those who participate will be required to make payments on time in return for this opportunity to reduce their monthly mortgage payments and stay in their homes. Home owners who remain current on their mortgage payments following loan modification will be eligible for an incentive of up to $1,000 a year from the government for five years. The bonus will be applied to the borrower’s mortgage to lower the principal balance.
The mortgage modification program will also be available to home owners who are “underwater” and owe more on their mortgage than their home is worth.
The plan seeks to shore up Fannie Mae and Freddie Mac to help keep mortgage rates low for millions of middle-class families looking to buy a new home or to refinance an existing one.
The Treasury Department will provide additional financial support for Fannie and Freddie and allow them to increase their portfolios, which is designed to help the broader mortgage finance market.
The Treasury and the Federal Reserve will also continue purchasing Fannie Mae and Freddie Mac mortgage-backed securities to lower mortgage rates and to maintain stability and liquidity in the marketplace.
The foreclosure prevention package also calls on Fannie and Freddie to provide support to state housing finance agencies. These agencies are currently frozen out of the credit markets and are unable to provide much-needed support to first-time home buyers.
With Fannie and Freddie helping the state housing finance agencies to increase their liquidity, this will provide a ripple effect to strengthen the mortgage markets, said Robson.
While the Administration’s plan is aimed at helping to ease excess capacity in the market due in large part to an unprecedented wave of foreclosures, Robson said that Congress still needs to take additional measures to stimulate housing demand to get the economy moving forward again.
“Until we move to resolve the housing crisis, we will not be able to pull the nation out of recession,” he said.