President Obama Outlines Foreclosure Plot

President Obama announced a sweeping plot to help stabilize housing prices and prevent further foreclosures, in Mesa, Ariz., on Wednesday.

The Homeowner Affordability Stability Plot includes several new initiatives designed to relieve struggling homeowners and stabilize housing prices nationwide.

The first component of the plot encourages refinancing by allowing four to five million “responsible” homeowners whose loans were owned or guaranteed by Fannie Mae or Freddie Mac to refinance their mortgages, reducing monthly payments.

President Obama addressed the need for broad refinancing efforts to prevent borrowers that are underwater in their loans from heading into foreclosure, stating, “…[W]e are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too — as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs.”

Another component involves the allocation of $75 billion to provide encouragement for homeowners on the verge of default to modify their loans. Lenders will be encouraged to lower interest rates for up to five years in an effort to bring down monthly payments; the Treasury Department will match the difference between the original rate and the adjusted interest rate. Lenders also have the option of reducing the principal balance on the mortgage loan, with Treasury sharing in the cost to the lender.

The Administration will also take steps to reform bankruptcy laws to support mortgage modifications.

“My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their honest market value — as long as borrowers pay their debts under a court-ordered plot,” the President said in his speech.

Treasury will give incentives of $1,000 to loan servicers for each mortgage eligible for modification and will pay up to $1,000 annually for each year the borrower stays current on the loan. Incentive payments of $1,500 would be paid to borrowers holding at-risk loans if they are able to restructure their loans prior to falling behind on loan payments and an additional $500 would be paid to servicers assisting those borrowers.

The Administration will also partner with the Federal Deposit Insurance Corp. to make an insurance fund of up to $10 billion to discourage lenders from foreclosing on mortgages that could have been modified. Mortgage holders could be paid an additional insurance payment for each modified loan they hold, if the home price index declines.

Finally, the plot will increase Treasury’s funding commitment to Fannie Mae and Freddie Mac and the Federal Reserve will continue to buy long-term mortgage securities to maintain stability in the mortgage market.

This announcement comes on the heels of President Obama’s signing into law the largest federal stimulus plot in decades. The American Recovery and Reinvestment Act, the $787 billion stimulus bill, will use government funds to stimulate the economy and save jobs.