We all saw last week the consequences of an under-detailed White House plan to help our economy. Wall Street made it apparent with the 300 point hit to the stock market shortly thereafter, that it would much prefer the White House dish out some details when unveiling a plan. Well, at least the White House got that message loud and clear, and Wednesday morning in Phoenix, President Obama outlined in detail, a plan called the Homeowner Affordability and Stability Plan (HASP).
So what kind of details did he outline? Far more than I wish to write about but let me give you the gist:
Essentially, the $75 billion plan aims to allow four million to five million homeowners to refinance mortgages guaranteed by the government-controlled Fannie Mae and Freddie Mac. This plan does not target speculators or investors; only homeowners.
Though already opposed by many financial institutions and lenders, the plan seeks to allow judges to modify mortgages in bankruptcy court for homeowners facing specific dire circumstances.
In addition to the $75 billion, the Treasury Department would buy $200 billion in preferred shares in Fannie and Freddie (This money would come from the 2008 Housing and Economic Recovery Act and NOT from the $700 billion financial bailout). According to Treasury Secretary Timothy Geithner, “The increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambition efforts to ensure mortgage affordability for responsible homeowners”.
In the past, Freddie and Fannie were restricted from guaranteeing refinancing on mortgages valued at more than 80% of the home’s worth. The plan would remove that restriction on mortgages that they already own or guarantee. The President said, “This will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to the taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in default and foreclosures”.
Incentives for the lenders to lower rates include $500 awarded to service providers and $1500 to mortgage investors if at-risk loans are modified before borrowers fall behind on their payments.
In addition, the government is enticing homeowners with principal reductions of $1000 a year for five years IF they stay current on their payments.
Also, if a lender modifies a loan so that the buyers were spending 38% of their monthly income on mortgage payments, the government would provide matching funds to lower that payment further to 31% of their monthly income.
“…all of us are paying a price for this home mortgage crisis,” Obama said Wednesday morning, “and all of us will pay an even steeper price if we allow this crisis to deepen.” Just as with the $700 billion stimulus plan the Obama administration passed last week, this is going to take at least a couple months to get off the ground and it will require the efforts of many to ensure it reaches its full potential as a plan. And there are those of course, who are skeptical. Healy writes that “Economist and lobbyists offered support for the planks laid out by Mr. Obama, but said they might not go far enough to addressing the problems of millions of homeowners who are “underwater” and owe more than their houses are now worth. And they warned that renegotiating mortgages could be extraordinarily complex, and that even Mr. Obama’s plan might not make enough of a difference as the economy sinks farther”. Well certainly this might not make enough of a difference. In fact it is likely that it won’t be enough. After-all, this is not your run of the mill dip in the economy or real estate market. This, for lack of a better and less-used word, is a crisis.
But this plan was formulated with the guidance of the banking industry, consumer groups, and academics, and it seems that the Obama administration is off to a solid start addressing our nation’s major problems head on and in an effective manner. As with the stimulus bill, this is something that needs to get going now, as opposed to arguing about how effective it will be and waiting several months to get it passed and I am waiting with bated breath to hear what criticisms the Republicans are going to have for the plan. And although this plan will certainly not solve our ailing real estate economy, it may be able to slightly lessen the pain for millions of Americans. “If you lose your job even if they cut your [mortgage] payments by $200 or $300, it’s not going to make things much better,” said Christian Menegatti, lead analyst at RGE Monitor. “But it’s a first step”. And at this point, a first step feels like a huge victory.
By Andrew Brentan