Today, President Obama unveiled the Homeowner Affordability and Stability Plan, which is part of the Financial Stability Plan announced by Treasury last week. Today's announcement comes one day after President Obama signed the $787 billion American Recovery and Reinvestment Act, and hours after the Commerce Department announced that new housing starts in January were lower than any other month in the past 40 years.
In his remarks today, President Obama pledged to rescue “families who played by the rules and acted responsibly” but not “the unscrupulous or irresponsible, … speculators, … dishonest lenders, or folks who bought homes who from the beginning knew they couldn’t afford.” The three key components to the plan, as reflected in the executive summary, a separate “fact sheet” and a consumer Q&A, are:
- Refinancing for up to 4 to 5 million “responsible homeowners” with conforming loans owned or guaranteed by Fannie Mae or Freddie Mac but who are unable to refinance and take advantage of lower interest rates because their home price has fallen relative to the outstanding principal on the loan to the point where the loan-to-value ratio exceeds 80%. Assuming a homeowner otherwise would qualify for the refinancing of a conforming loan, the homeowner should now be able to refinance through the GSEs.
- A $75 billion homeowner stability initiative to reach up to 3 to 4 million at-risk homeowners who commit to making payments to stay in their home and reduce the amount homeowners owe per month to sustainable levels through financial incentives to borrowers and to services and mortgage holders and clear loan modification guidelines (to be released in approximately 2 weeks), which will include lender reductions of interest rates and government/lender matches to effectively subsidize a qualifying borrower’s payments. All financial institutions receiving Financial Stability Plan assistance going forward will be required to implement loan modification plans consistent with Treasury guidance. Statistics collected by banking regulators in the second and third quarters of 2008 indicated a high re-default rate for modified loans; whether the forthcoming guidelines address this issue remains to be seen. The $75 billion will come out of the approximately $350 billion remaining in Treasury’s Troubled Asset Relief Program. This amount is $25 billion greater than the amount announced last week by Treasury.
- Supporting low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac by increasing Treasury’s existing preferred stock purchase commitments from $100 billion to $200 billion each, to continue purchasing Fannie Mae and Freddie Mac mortgage-backed securities and increasing the size of their retained mortgage portfolios by $50 billion each. Treasury Secretary Geithner noted in a separate statement that “the increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners.”
President Obama also mentioned other comprehensive measures to reduce foreclosures and strengthen communities:
- Require strong oversight, reporting and quarterly meetings with Treasury, the FDIC (which is developing an insurance fund designed to provide an incentive for lenders to defer foreclosures that would otherwise be pursued out of fear that home prices will continue to fall), the Federal Reserve and HUD to monitor performance.
- Allow judicial modifications of home mortgages during bankruptcy for borrowers who have run out of options. This change would require legislation, and the House Judiciary Committee has approved legislation that would do just that. The Obama administration will support a carefully defined amendment that, for example, would limit these “cram-downs” to conforming loans.
- Provide $1.5 billion in relocation and other forms of assistance to renters displaced by foreclosure and $2 billion in neighborhood stabilization funds. The Neighborhood Stabilization Fund created last year will receive additional funds under the economic stimulus package that was enacted yesterday.
- Improve the flexibility of Hope for Homeowners and other FHA programs to modify and refinance at-risk borrowers (the House Financial Services Committee has previously approved legislation that would accomplish the same objective).
In closing, President Obama urged “individuals to take responsibility to live within their means and not assume that housing prices will go up by 20-30% each year.”