Real Estate & Mortgage Insights
Does the Obama Housing Plan Go Too Far or Not Far Enough?
According to estimated figures, one in ten U.S. mortgages were delinquent at the end of 2008 and the current administration believes that as many as six million homes could enter the foreclosure process over the next three years if the government does not intervene.
Backed by that rationale, President Barack Obama announced the details of his $75 billion plan Wednesday to help roughly nine million struggling homeowners avoid foreclosure.
"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly, by refinancing loans for millions of families in traditional mortgages who are underwater or close to it," he said in a speech at an Arizona high school.
Obama's Homeowner Affordability and Stability Plan is part of the $275 billion stimulus package announced last month and includes two main ingredients: helping homeowners refinance into more affordable loans, and giving incentives to lenders to modify mortgage terms for borrowers.
In order to be eligible for government refinancing help, homeowners must have conforming mortgages held by government-controlled companies Freddie Mac or Fannie Mae and must owe no more on their homes than 105 percent of the current market value.
In order to participate in the mortgage modification program, homeowners must be "at risk of default" with home loans originated before January 1, 2009 and must not have a principal balance of more than $729,750. The lender will reduce the monthly mortgage payments to 38 percent of the borrower's income and the government will subsidize the lender to reduce the payments down to 31 percent. In most cases, lenders are expected to reduce payments by lowering interest rates to 2 percent or less, but principal reductions and stretching out the loan length are other options.
After five years, the 2 percent rate will rise to the conforming loan rate from the time of modification and will increase by 1 percent or less each year thereafter. Borrowers can also receive up to $5,000 over five years for staying current on their modified loan payments.
Too Far
Some wonder if let the foreclosures run their course might actually be good for the housing market. According to real estate data company Radar Logic, foreclosure properties accounted for one third of all sales last year.
"Buyers recognize that those are at significant discounts versus what all other people are asking for homes and are migrating to those first," said Radar Logic chief executive Michael Feder.
Others worry that the government is spending too much money on incentives for lenders and borrowers when both parties already receive natural benefits from participating in mortgage modifications. Still others worry about a less talked about part of the Obama plan - a call for a change in the bankruptcy law that would allow judges to force lenders to write down the balance of failing loans. They fear that the new procedure would encourage more borrowers to file bankruptcy when it is not necessary, causing greater lender losses.
Not Far Enough
"The plan may not be aggressive enough," said John Taylor, president of the National Community Reinvestment Coalition as quoted in the Washington Post. "While the plan offers sweeteners to encourage lenders and homeowners to participate, its voluntary nature may blunt its impact."
Additionally, the Obama plan does not provide relief for those without Fannie or Freddie-owned mortgages, which account for about half of all U.S. home loans.
Many questions remain for the nation regarding the Obama housing plan. Is paying for your neighbor's mortgage worth it if it saves the general economy and possibly your own job? Will it even save the housing market and the economy from deeper recession? Whether the plan is too bold or not encompassing enough will be left up to judgments of Americans now and in the future.
