$275 Billion on Foreclosures

The Obama administration today released a plan to stem foreclosures.


U.S. President Barack Obama pledged $275 billion to a program that includes cutting mortgage payments for as many as 9 million struggling homeowners and expanding the role of Fannie Mae and Freddie Mac in curbing foreclosures.

The plan will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, the president said. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, he said.

CBS Market Watch:

  • Allows 4 million–5 million homeowners to refinance via government-sponsored mortgage giants Fannie Mae and Freddie Mac.
  • Establishes $75 billion fund to reduce homeowners' monthly payments.
  • Develops uniform rules for loan modifications across the mortgage industry.
  • Bolsters Fannie and Freddie by buying more of their shares.
  • Allows Fannie and Freddie to hold $900 billion in mortgage-backed securities — a $50 billion increase.

They are encouraging the modification of bankruptcy law so a judge may make modifications of the primary mortgage.

The main focus seems to be lowering the interest rate on mortgage payments but it also mentions lowering the actual principle left on the mortgage.

A low interest rate must be kept in place for 5 years.

Calculated Risk has more details, probably the most in depth post and analysis I have found.
They also point out in the plan:

For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.

This is not so good. The Obama administration doesn't understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key

[S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.

This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.

Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

I have to agree with Calculated Risk. So many people signed up for homes they could not afford and there has to be some responsibility here.

But on the other hand, the banks, the lenders, those packaging up these bad loans and trading them like baseball cards which eventually led to a global financial meltdown assuredly need some strong consequence here. If anyone is responsible it is everyone in the industry who got rich trading fictional money and fictional value.

The other issue I have is the fundamental problem: houses are too expensive. The prices are way out of alignment with the median wage in the United States. So until the price of a home comes into alignment with what people can actually afford, I just see a continuation of a bubble mentality.

Where is that U.S. manufacturing plan Obama administration? When will it be acknowledged that Corporations, global agendas and bad policies over the last 30 years have bled the U.S. middle class dry and gee wiz, by the way, the United States Economy is the U.S. middle class.

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