White House: Housing Plan Could Help Up to 9 Million People

By DAMIAN PALETTA WASHINGTON – The Obama administration announced new plans Wednesday to make it easier for up to nine million people to rework or refinance their mortgages, as the White House began an aggressive effort to stabilize the U.S. housing market. President Barack Obama, speaking in Phoenix, said the plan "will give millions of families resigned to financial ruin a chance to rebuild [and] prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone." A central element of the plan would allow up to five million people to refinance their mortgages into more affordable products through Fannie Mae and Freddie Mac, according to a summary of the plan. A total cost of the effort wasn't immediately clear, though it could be more than $275 billion because of new government commitments to help fund Fannie Mae and Freddie Mac. The Obama administration's plan has three main elements: the effort to help homeowners refinance, particularly when the value of their mortgages nears or exceeds the current value of their homes; a $75 billion initiative to modify loans to make payments more affordable for as many as four million borrowers whose interest rates have skyrocketed or whose incomes have fallen; and broader steps aimed at driving down mortgage rates. The White House also called for a controversial provision to allow bankruptcy judges to rework the terms of mortgages in court. The banking industry has fought such a law for years, although some banks have recently softened their stance. The housing plan is part of a broader effort by Washington to address the stalling U.S. economy. It comes after Congress passed a major fiscal stimulus package and the Treasury Department released its plan to shore up the banking sector. "The effects of [the housing] crisis have also reverberated across the financial markets," Mr. Obama said. "When the housing market collapsed, so did the availability of credit on which our economy depends." The Obama plan appears much more comprehensive than the voluntary measures attempted by the Bush administration, though the Obama administration would also count on the industry to mobilize behind these initiatives. One major difference is the bankruptcy-court provision, which could be seen as a penalty for banks that don't go along with the government's plan to modify mortgages before a homeowner goes bankrupt. Mr. Obama was quick to address concerns that the plan could be exploited by homeowners who took risky bets on the housing market. He said the proposal is focused on those who "played by the rules." Obama commented on the home mortgage crisis at Dobson High School in Mesa, Ariz. Obama unveiled a strategy that aims to help millions of people avoid housing foreclosure. "I want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans," Mr. Obama said. The plan, like the $787 billion stimulus package that Mr. Obama signed into law Tuesday, is likely to spark partisan warfare, nonetheless. House Republican leader John Boehner (R., Ohio) and party whip Eric Cantor, (R., Va.) sent Mr. Obama a letter asking questions about the plan, including how the administration will prevent homeowners who receive aid from eventually going back into default, and whether banks would be compensated for making loans "they should have never made in the first place." Fannie Mae and Freddie Mac, which are privately held companies under government control, figure prominently in the housing plan. The companies generally are barred from owning or guaranteeing mortgages that are more than 80% of a home's value, as those loans are seen as much riskier. But the Obama plan would allow them to buy or guarantee these riskier loans if refinancing a loan they already own or guarantee. This could be possible if an $80,000 loan was purchased by Fannie Mae last year for a $100,000 house, but the house is now worth just $75,000. Allowing the companies to buy or guarantee riskier loans could give them a bigger role in stabilizing the housing market but it could also expose them to heavier losses in the coming months. Still, Mr. Obama stressed the benefits of the plan. Noting that falling housing prices have made it more difficult for families to refinance their loans, or to sell their homes to move into more-affordable ones, he said, "this will allow millions of families stuck with loans at a higher rate to refinance. The estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures." The government said it would increase its limits on the size of Fannie Mae's and Freddie Mac's portfolios to $900 billion each, up from $850 billion. Treasury also said it would increase its funding commitment to both companies "to ensure the strength and security of the mortgage market and the help maintain mortgage affordability." (See the statement.) Treasury also plans to increase its preferred-stock purchase agreements with the companies to $200 billion each, up from $100 billion each. "The increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners," Treasury Secretary Timothy Geithner said. Under the plan, the White House also plans to use government money to entice homeowners, mortgage companies and mortgage investors to rework loans, with the aim of lowering monthly payments. Servicers can receive an upfront payment of $1,000 for each loan modification that meets certain criteria. The government said it would pay servicers $500 and mortgage investors $1,500 if at-risk loans are modified before borrowers fall behind on their payments. The government said it would also help pay down the principal of certain mortgages by up to $1,000 a year for up to five years if the borrower doesn't miss any payments. For a loan modification to quality for assistance, lenders would need to bring the monthly mortgage payment down to 38% of a borrower's monthly income. The government would match further reductions in the interest rate down to 31% of the borrower's income. The new proposals don't require that a borrower already be late on payments to qualify for help—a requirement that had encouraged some to stop paying their mortgages in order to qualify. Mr. Obama said that within two weeks, guidelines would be set up for modifying mortgages. "Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines," he said. The housing plan contained many more details than a plan released last week to address problems in the banking sector, which sent financial markets tumbling amid criticism that the effort was light on specifics. The Obama administration met repeatedly with the banking industry, consumer groups and academics as it worked to formulate its housing plan. Still, financial stocks were trading lower Wednesday after the plan was announced as traders viewed the plan as another desperate measure in increasingly desperate times.