Feb. 18, 2009 -- President Obama today pledged to help up to 9 million homeowners facing foreclosure or struggling to make their mortgage payments.
First, some 4 million to 5 million families who have seen their home values drop, but are not at risk of foreclosure, would now be able to refinance into new mortgages.
The other group, 3 million to 4 million homeowners with adjustable-rate mortgages, would be able to temporarily have their loans modified to a lower interest rate -- for at least five years.
The cost was not initially clear, but just one aspect of this plan was given a $75 billion price tag. The overall program is likely to well exceed that.
"By making these investments in foreclosure-prevention today, we will save ourselves the costs of foreclosure tomorrow -- costs borne not just by families with troubled loans, but by their neighbors and communities and by our economy as a whole," Obama said at Dobson High School in Mesa, Ariz. "Given the magnitude of these costs, it is a price well worth paying."
Arizona was chosen as the site to unveil the plan because unemployment in the state was 6.9 percent in December 2008, and Arizona recorded 117,000 foreclosures in 2008, the third highest number in the U.S.
Obama said his plan also helps homeowners who don't fit into those two categories by stabilizing the home prices of entire neighborhoods, ensuring that their investments in their homes do not suffer.
"In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen -- a crisis which is unraveling homeownership, the middle class and the American Dream itself," the president said.
'Responsible Homeowners' Can Refinance
Under current lending standards, only those who owe less than 80 percent of their home's value can easily refinance. The problem is that millions of Americans who might have originally put 20 percent of the home's value into a down payment have now seen their home values plunge, making it nearly impossible to take advantage of today's historically low interest rates.
Obama wants to allow 4 million to 5 million families who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.
The plan could save homeowners hundreds of dollars a month. Obama's staff presented an example of a family with $200,000 outstanding on a 6.5 percent mortgage. If they refinanced at 5.16 percent, they could save almost $200 each month.
Fannie Mae and Freddie Mac are privately held companies under government control. To implement this plan, the government will use $100 billion in Treasury funds to increase the size of their portfolios from $850 billion each to $900 billion so the companies can loan that money out and lower interest rates.
"While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures," Obama said.
What was initially unclear is whether homeowners who now owe more money than their homes are worth would qualify for such refinancing. Also unclear was exactly who else would or would not qualify for new loans.
The Treasury Department plans to develop uniform guidelines for loan modifications, but did not release those specifics today. Those are expected two weeks from today.
A major part of the plan, and one that is likely to have the most immediate impact, will help 3 million to 4 million homeowners in foreclosure or at risk of imminent foreclosure.
These people, mostly with subprime and exotic loans, would have their monthly payments reduced, with lenders and the government splitting the costs involved with cutting the mortgages to lower rates.
The program is modeled, in part, on a formula that FDIC Chairwoman Sheila C. Bair has been using to help homeowners with mortgages at the failed IndyMac bank. Bair, through the government's takeover of IndyMac, has done more than 10,500 such loan modifications.
The first step is solely in the hands of the banks and other mortgage servicers. They have to somehow get the monthly mortgage payments down to 38 percent of the borrower's gross pay. The government will not assist in that part, leaving the banks and investors to take a loss as borrowers' monthly mortgage payments shrink.
Once that threshold is reached, government aid kicks in. The bank and the government will share the cost of getting that loan down to a 31 percent debt-to-income ratio. That lower interest rate must stay in effect for at least five years.
"This part of the plan will require both buyers and lenders to step up and do their part," Obama said. "Lenders will need to lower interest rates and share in the costs of reduced monthly payments in order to prevent another wave of foreclosures. Borrowers will be required to make payments on time in return for this opportunity to reduce those payments."
Unlike past proposals, this plan isn't just for those who are already in foreclosure; it will include people who are current on their mortgages but at risk of foreclosure.
It also provides financial incentives for banks to make the modifications and for borrowers to stay current on their loans.
Loan servicers get a $1,000 up-front fee for modifications that meet the requirements of the program and an additional $1,000 "success fee" each year a borrower stays current for up to three years.
Borrowers can get up to $1,000 a year for five years if they stay current on their modified mortgage payments.
This initiative will go solely to helping homeowners who commit to make payments to stay in their home. It will not aid speculators or house flippers.
ABC News asked Treasury Secretary Timothy Geithner about a criticism that the president's new plan provides financial incentives for lenders and borrowers to do what they should be doing anyway -- making payments on time and trying to stave off foreclosures.
"People tried other approaches to help fix this problem and they are not working," Geithner said. "So what we tried to do is put together a more powerful package of incentives and other 'inducements,' I'll call them, to try to make sure you get a level of participation and a level of relief in mortgage payments that has not been achieved ... so this represents our best judgment of that, and you have to look at those costs against the very substantial benefits this will bring to homeowners across America and to the overall economy as a whole."
The administration also plans to go to Congress to allow bankruptcy judges to modify mortgages. Housing advocates have been pushing for this plan while lenders said this will increase risk to them and cause mortgage rates for all to increase.
Obama also will require participating banks and services to report on the modifications with regulators. He is also providing $1.5 billion in help for renters forced to move when their landlords go belly up and $2 billion in help to cities to clean up and maintain foreclosed properties.
Too Many Groups Fighting For Own Interests
Bruce Marks, CEO of the Neighborhood Assistance Corporation of America, a nonprofit community advocacy and homeownership organization, has been an outspoken critic of the Obama administration for not doing enough, sooner.
"President Obama, when he was campaigning, said one of the first things he would do is put a moratorium on foreclosures," Marks said. "I agree you have to deal with jobs, because if you don't have a job, then you can't own a house. But while he's figuring that out, he could have been out there saying, 'No more foreclosures.' And he did not do that."
Marks said reducing people's mortgage payments is good, but warned that any mortgage modifications should be long-term. Otherwise, he said, "homeowners will make a rational decision to walk away."
The problem for Obama, Marks said, is that he has too many groups fighting for a plan that best serves their own interests. Marks fears that Obama's plan will only offer temporary relief and not provide a long-term solution.
Marks has been critical of Treasury Secretary Timothy Geithner, saying he is just like his predecessor, Henry Paulson, except "with hair." Marks likes to call him "Tiny Tim."
"It's small ideas for a huge problem," Marks said. "We've got a huge problem and he's got to step up to the problem."
Guy Cecala, publisher of Inside Mortgage Finance, said he doesn't think the foreclosure problem has even peaked.
"Given the fact of unemployment surging ahead, we're going to see a whole bunch more of foreclosures down the pike," Cecala said.
Cecala added that loan modifications are occurring, but not as fast as foreclosures are occurring.
"So, we really haven't addressed any fundamental problem with that," he said, "plus, we have the deteriorating economy, which should greatly pick up the number of people who have trouble paying their mortgage and lead toward foreclosures."
To date, he said, no concrete steps have been taken to reduce the number of foreclosures except to put a moratorium of a month or two on new ones.
"And if that's the case, all you're doing is postponing the inevitable," Cecala said. "Generally, if you've got a foreclosed property and you don't do anything about it during your moratorium, you're just going to foreclose on that property once the moratorium is over."
Marks blames the heads of some financial firms for not doing enough. Earlier this month, Marks and about 400 other people staged a protest in front of the Greenwich, Conn., home of William Frey, manager of Greenwich Financial Services, and the Rye, N.Y., home of John Mack, chief executive of Morgan Stanley.
Marks said the government needs to somehow provide an incentive to executives like Frey and Mack to solve the problem. For instance, banks and other loan servicers right now have no incentive to hire more staff to restructure existing mortgages.
His solution: have the government pay $1,000 for every restructure they do. Under that plan, 10 million mortgages could be reworked for less than the $100 billion figure being thrown around.
"Obviously, prior to this, $100 billion seemed like a lot of money. Now, we think of $100 billion, it's just $100 billion," Marks said. "Boy, has the world changed."
But it's not as simple as just lowering an interest rate or forgiving debt. Somebody's got to foot the bill.
Investors would love for the government to pay the cost of reworking the mortgages, saving them potential large losses. And advocates like Marks suggest the government rework the loans, forcing investors to take a loss.
The investors would suffer, he said, "but they are taking less of a hit than they ordinarily would" if everybody defaults on their loans.
With reports from Jake Tapper and Matthew Jaffe