Obama's Housing Market Plan Aims to Stop Foreclosures

On February 18, the day after signing the landmark 2009 Stimulus legislation into law, President Barack Obama unveiled his $75 billion plan to help up to 9 million families restructure or refinance their mortgages to avoid losing their homes to foreclosure.  The plan, known as the Homeowner Affordability and Stability Plan (HASP), has two phases with a number of elements.

HASP Phase 1 – This is designed to help homeowners who are not delinquent on their mortgages to refinance into more affordable, conventional fixed-rate mortgages at lower rates.

HASP Phase 2 – This will help "at-risk" homeowners (or homeowners who are already delinquent) avoid the foreclosure process by lowering interest payments through more affordable loan terms and in some cases by subsidizing the loan payments. 

The following are the key elements of Obama’s HASP plans:

• Remove FMA and FRM lending restrictions - Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than what it is worth.  The White House says this could reduce monthly payments for up to 5 million homeowners.

• Create incentives for Sub-prime Lenders - Create incentives for lenders to modify subprime loans at risk of default or foreclosure.  For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment.  Participating lenders also will be required to cut payments to no more than 31 percent of a borrower’s income.  Up to 4 million homeowners could benefit.

• Keep mortgage rates low - Keep mortgage rates low for millions of middle-class families seeking new mortgages.  Using money already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to buy Fannie and Freddie mortgage-backed securities to maintain stability and liquidity in the marketplace.  The department, through its existing authority, will provide up to $200 billion in capital for this purpose.

• Pursue reforms - Pursue reforms to help families avoid foreclosure.  The administration will continue to support changing bankruptcy rules so judges can reduce mortgages on primary homes to their fair market value, as long as the borrower sticks to a court-ordered repayment plan.  As part of the $787 billion stimulus package that Obama signed into law on Tuesday, the administration will award $2 billion in competitive grants to communities experimenting with innovative ways to prevent foreclosures.

Only time will tell how these efforts to shore up the real estate market will pan out.  Some sources believe housing prices need to drop another 10% or so to be consistent with current incomes and rents.  It will take a long time for the market to stabilize with such a high inventory of housing in the U.S., and housing prices will continue to plunge as long as there is an influx of homes flooding the market.

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