The Obama administration on Wednesday unveiled the U.S.
government's most aggressive attempt yet to deal with the
foreclosure crisis, pledging billions of dollars in new programs to
help 7 million to 9 million borrowers.
The ambitious proposal would address the housing crisis on a
variety of fronts - helping millions of borrowers refinance into
more affordable loans, preventing at-risk or "underwater" borrowers
from falling behind on payments, and taking advantage of government
control of Fannie Mae (FNM) and Freddie Mac (FRE) to stabilize
house prices and provide much-needed liquidity.
It will also include enticements to encourage both borrowers and
lenders to work to prevent foreclosures, including payments to
reduce the principal on loans and bonuses for mortgage firms that
successfully rework mortgages.
Obama formally introduced the plan in remarks in Phoenix, saying
that the government cannot fail to address a housing crisis that
has brought down the broader economy.
"In the end, all of us are paying a price for this home mortgage
crisis," Obama said. "And all of us will pay an even steeper price
if we allow this crisis to continue to deepen - a crisis which is
unraveling homeownership, the middle class and the American Dream
itself."
The centerpiece of the program is a plan to let 4 million to 5
million homeowners currently unable to refinance their loans
because of falling home prices to do so using Fannie Mae and
Freddie Mac. It would be limited to borrowers who took out a
conforming loan owned or guaranteed by one of the two
government-sponsored enterprises, and would allow them to refinance
even if they owe more than 80% on the value of their homes.
"For many families, a low-cost refinancing could reduce mortgage
payments by thousands of dollars per year," according to background
documents released by the Treasury Department.
That proposal will be coupled with a $75 billion "homeowner
stability initiative" that includes standardized industry
guidelines for modifying loans, new requirements for firms that
receive government rescue funds, and allowing bankruptcy judges to
rework the terms of some loans.
This second proposal will focus on reaching borrowers who are
not yet in the foreclosure process or who are underwater, meaning
they owe more on their loan than the value of their house. The
three-year plan will be restricted to borrowers who live in their
homes, and who have loans within the Fannie Mae and Freddie Mac
conforming loan limits.
The goal would be to reduce monthly mortgage payments by having
lenders reduce the interest rate on mortgages so that the payment
is no more than 38% of a borrowers income. At that point, the
Treasury will match dollar-for-dollar any further interest rate
reductions until a 31% debt-to-income ratio is reached. The new
payments would then be kept in place for five years.
Lenders would also have the option of reducing a borrower's
principal to lower the monthly payments, with Treasury sharing the
partial costs of any reduction. The financial services industry has
generally shied away from reducing borrowers' principal in the
various voluntary efforts that have been conceived over the last
two years.
A senior administration official boasted that the new plans are
more sweeping in scope and in terms of who qualifies than
initiatives promoted by the Bush administration. The new proposals
do not premise a borrower's participation on being delinquent, a
requirement that had encouraged some to stop paying their mortgages
in order to qualify or walk away from their homes altogether.
"Everybody has an incentive to play by the rules," the official
said.
To encourage loan-modification efforts, which had been
underwhelming, the government would provide servicers with various
incentives. Firms would receive an up-front fee of $1,000 for each
eligible modification, and could then earn an additional $3,000 in
annual bonus payments for successful modifications. Mortgage
investors would also be eligible for a $1,500 payment, and mortgage
servicers $500, for working with borrowers who have not yet fallen
behind on their loans.
Likewise, to encourage borrowers to stay current on their
payments, the $75 billion program would include money to provide up
to $5,000 over five years to borrowers who stay current. The money
would be targeted at reducing the principal on borrowers'
mortgages.
The administration official said the new plans will be
administered and audited by Fannie Mae and Freddie Mac because they
have the technical capacity to do so.
Obama was quick to address concerns that the plan could be
exploited by homeowners who took risky bets on the housing market.
Obama said the proposal is focused on those who "played by the
rules." People whose traditional mortgages are "underwater" will be
eligible for refinanced loans, while people with subprime mortgages
will be able to modify their loans.
"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," Obama said. "It will not help
speculators who took risky bets on a rising market and bought homes
not to live in but to sell. It will not help dishonest lenders who
acted irresponsibility, distorting the facts and dismissing the
fine print at the expense of buyers who didn't know better."
Changes at Fannie Mae and Freddie Mac are large components of
the president's plan, and could reignite political debate over the
government-controlled firms' role in the housing market.
Under the proposal, the Treasury Department will boost its
funding commitment to the companies from $100 billion to $200
billion each and increase the size of their retained mortgage
portfolios by $50 billion to $900 billion, moves designed to show
financial markets that the government stands tightly behind the
firms.
The administration official said Fannie and Freddie won't be
exposed to new losses as a result of the plan.
"We're also going to work with Fannie and Freddie on other
strategies to bolster the mortgage market, like working with state
housing finance agencies to increase their liquidity," Obama
said.
Obama also said that any financial firms receiving, or hoping to
receive, taxpayer financial assistance through the $700 billion
Troubled Asset Relief Program would have to agree to modify their
loan books along the guidelines established in the housing
proposals.
As outlined by Obama, the housing plan is far more detailed than
the administration's financial rescue package, which investors
panned last week. It's unclear, however, how much input Wall Street
had in crafting the housing plan.
Amid concerns that taxpayer money could be used to bail out
homeowners who bit off more than they could chew, Obama painted a
dire picture of the housing crisis, saying that its pain is being
felt outside foreclosure-battered neighborhoods. "Companies in your
community that depend on the housing market - construction
companies and home furnishing stores, painters and landscapers -
they're all cutting back and laying people off," Obama said.
The plan, like the $787 billion stimulus package Obama signed
into law Tuesday, is likely to spark partisan warfare,
nonetheless.
House Republican Leader John Boehner, R-Ohio, and GOP Whip Eric
Cantor, R-Va., sent Obama a letter asking a series of questions on
the plan, such as how the administration will prevent homeowners
who receive aid from eventually going back into default.
Obama's speech Wednesday will likely be the opening of a broader
marketing pitch to the public. Administration officials told
congressional staff that the White House is considering using
"well-known celebrities" to sell the housing plan, according to a
person present when the idea was discussed. An administration
official declined to confirm that strategy.
-By Michael R. Crittenden and Henry J. Pulizzi, Dow Jones
Newswires; 202-862-9256; henry.pulizzi@dowjones.com
(Maya Jackson-Randall contributed to this report.)