- The Washington Times - Thursday, February 19, 2009

President Obama offered a long-awaited plan Wednesday to spend up to $275 billion to help troubled homeowners refinance and stay in their homes.

The program, which was far more expensive than the $50 billion the administration initially suggested, aims to assist up to 9 million homeowners who are behind on their mortgage payments, in danger of losing their homes or stuck with mortgages that they cannot refinance because their home’s value has dropped below the outstanding loan value.

Fannie Mae and Freddie Mac would play a critical role in helping some of the one in five homeowners who are “under water” in this way. The mortgage finance companies, which are now under federal government control, would receive $200 billion in funding to cover expected losses.

The remaining $75 billion of the plan would come from the Treasury Department’s bank bailout fund. This money would be used to subsidize homeowners and lenders who negotiate lower payments on defaulted loans.

The plan was announced as the government reported housing construction plummeted to a record low last month, showing that the housing crisis has worsened since the beginning of the year. Credit for both homeowners and builders has dried up despite strenuous attempts by the Federal Reserve to lower interest rates and restart stalled markets. Many economists expect home sales, prices and construction to continue declining this year.

“In the end, the home mortgage crisis, the financial crisis and this broader economic crisis are interconnected,” the president said in a speech in Arizona, which has one of the highest foreclosure rates in the nation. Along with his $787 billion economic stimulus plan and bank bailout program, the president said the foreclosure prevention aid is needed to break the downward spiral in the economy.

“All of us are paying a price for this home mortgage crisis,” he said. “And all of us will pay an even steeper price if we allow this crisis to continue to deepen.”

The plan was applauded in Congress, where Democratic leaders for months called on the Bush administration to come up with a plan to aid homeowners after having spent nearly $400 billion aiding failing banks and auto companies.

Republicans also welcomed the plan, though they raised questions about whether the aid will go to homeowners who lied about their incomes to obtain loans, or will unnecessarily aid millions of homeowners who can afford to pay their loans. Housing speculators and second-home owners are not eligible for assistance, and the administration insisted that it will screen homeowners to ensure they genuinely need the aid.

“Republicans want to work with the president on a plan that keeps families in their homes without asking taxpayers to bail out irresponsible lenders, scam artists and borrowers who knowingly made bad decisions,” said House Minority Leader John A. Boehner, Ohio Republican. He questioned the enhanced role given to Fannie Mae and Freddie Mac, which are longtime targets of Republican lawmakers.

Taking a “carrot and stick” approach, the plan seeks to lower monthly mortgage payments for delinquent homeowners through various incentives ranging from helping to make interest payments to rewarding lenders and borrowers with stipends of $1,000 to $1,500 for staying current on the loans. For homeowners with unaffordable loans, the goal would be to lower payments to less than a third of their pretax income.

By providing cash payments to borrowers who stay current and mortgage companies that agree to modify loans, the programs aims at avoiding two major problem that arose with the previous administration’s efforts to stem foreclosures: persistently high rates of re-default on loans modified by banks, and a reluctance by servicing companies - which have contractual obligations to protect investors’ interests - to negotiate loan terms that are adverse for investors.

The administration also is taking a coercive approach toward uncooperative lenders, requiring any bank that received bailout funds to participate in the program. That includes the top four banks that service $6 trillion of mortgages: Bank of America, Wells Fargo, JP Morgan and CitiMortgage.

The administration also threw its weight behind legislation that would allow bankruptcy judges to write down mortgage debts for the first time - a proposal that is strenuously opposed by the finance industry and many Republicans. Critics say the bankruptcy proposal would drive up interest rates for all homeowners because lenders will assume that any mortgage contract could be nullified by a bankruptcy judge.

“Obama’s plan is an ambitious one,” said Patrick Newport, an economist at IHS Global Insight. “It goes much further than previous proposals to stabilize housing. It will help reduce the number of ‘preventable foreclosures.’ Whether it will stop the bloodletting, however, time will tell.”

Mr. Newport noted that house prices have fallen by 22 percent since peaking in June 2006, leaving 10 million to 15 million homeowners “under water.”

“And the number is growing rapidly because house prices are in a free fall,” he said. “The key question is how many of these homeowners will opt to walk away from their homes.”

Andrew Jakabovics, an analyst with the Center for American Progress, a think tank headed by former Clinton administration Chief of Staff John Podesta, said the plan “wisely leverages Fannie Mae and Freddie Mac” by giving them authority to refinance loans that they own that are up to 5 percent greater than a home’s value. Previously, they could not refinance loans worth more than 80 percent of a home’s value. The change will enable homeowners who are otherwise creditworthy but “under water” to take advantage of today’s low 5 percent interest rates on 30-year mortgages.

Despite the administration’s move to set aside $200 billion to pay for potential losses on the refinanced loans, Mr. Jakabovics said, the program should cost nothing because the reduced mortgage payments to Fannie and Freddie will be offset by lower losses from foreclosures.

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