President Barack Obama offered $75 billion to millions of Americans on the verge of foreclosure Wednesday. This was intended to not only to save their homes but to keep the housing crisis worsening the national economy.
The plan is $25 billion larger than the administration had been suggesting and is geared towards preventing millions of homeowners from foreclosure and to stabilize housing markets. The government support to Fannie Mae and Freddie Mac is being doubled to $400 billion. This would encourage them to refinance loans that are “under water”. The are homes in which market values have dropped below the amount the owners still owe on their mortgages.
Obama feels that although this is a steep price to pay, it will be steeper if we do not do anything and allow the houseing market to deteriorate further.
The administration is trying to loosen refinancing guidelines and restrictions and providing incentives for lenders to modify loans. The problem is that participation is not mandatory.
A word of caution came from John Courson who is the chief executive of the Mortgage Bankers Association…….”It seems to offer little help to borrowers whose loan exceeds their property value by more than 5 percent.” Obama also indicated that the plan will not save every home.
The Obama administration feels confident that it is providing the right mix of incentives and penalties to make sure the banks participate. Obama would like to allow bankruptcy judges to modify the terms of primary home loans but that is being opposed by the lenders.
In theory, homeowners facing foreclosure would have the ability to refinance their loans and lower monthly payments. Lenders would voluntarily participate in the government programs.
The goal of the $75 billion Homeowner Stability Initiative is to cut monthly mortgage payments of nearly 4 million borrowers using money from the $700 billion financial industry bailout passed by Congress last fall.
The Treasury Department said it would absorb up to $200 billion in losses at Fannie and Freddie by continuing to purchase mortgage-backed securities from them. Fannie Mae and Freddie Mac are estimated to need a combined government subsidy of about $66 billion.
Obama emphasized that his plan will focus on helping families who have “played by the rules” stay in their homes while doing nothing to help those who were irresponsible. Those irresponsible people he was referring to includes those who purchased homes beyong their means and real estate speculators who purchased multiple properties in an effort to profit from the real estate boom