Up to 9 million families facing home foreclosure could see relief under President Barack Obama’s newly unveiled housing plan announced Feb. 18 in Mesa, Arizona.
The plan ‘will give millions of families resigned to financial ruin a chance to rebuild,’ President Obama stated. ‘It will 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.’
According to the president, the new plan takes four basic actions. First, government-owned Fannie Mae and Freddie Mac would lift their restrictions on refinancing of between 4 and 5 million mortgages the two institutions are responsible for. Current rules restrict refinancing to 80 percent of home values. Because many home values have collapsed to well below the cost of the mortgages on them, millions of families are ineligible for refinancing. Obama’s plan revises those rules and will vastly expand the numbers of homeowners who are eligible to refinance.
The net cost of this first step of the plan is zero, Obama emphasized. Lower payments made to Fannie Mae and Freddie Mac will be off-set by a smaller rate of foreclosure. The savings to taxpayers comes because foreclosure is more expensive for the lenders than refinancing.
The second part of the plan would put an estimated $75 billion toward providing incentives for other lenders who have accepted TARP money to refinance subprime mortgages currently at risk of default or foreclosure. Additionally, the plan would create subsidies for the costs of mortgage payments so that they are no more than 31 percent of household income. According to White House estimates, this part of the plan could help about 3 to 4 million homeowners keep their homes by reducing their mortgage payments.
Independent experts believe this restructuring model will make payments sustainable for middle-income home buyers and will enable them to stay in their homes.
A third portion of the plan would help ease the credit crunch and start to tackle the general financial crisis by using TARP funds that have already been authorized by Congress to buy back toxic mortgage-backed securities held by Fannie Mae and Freddie Mac. In addition, Obama pledged to work with state housing agencies to increase their liquidity. Once greater liquidity is achieved in the credit market, other homeowners not covered immediately by the terms of this plan will find refinancing easier in the future.
The fourth proposal would reform bankruptcy law to allow judges to reduce mortgage payments as part of a court-ordered settlement to allow families to keep their homes and make their payments.
Because this four-part plan focuses solely on the mortgages on primary residences and middle-income housing markets typically covered by Fannie Mae and Freddie Mac loans and guarantees, the plan excludes real estate speculators and investors and aims to help working families first.
During his speech in which he explained the plan, President Obama thumped bankers, speculators and Washington politicians who sought easy profits or looked the other way when bad business decisions leading to the collapse of the housing market were being made in the past. ‘We saw an erosion of our common values and in some cases in common sense,’ the president said.
Obama’s housing plan sharply contrasts with a proposal put forward by Senate Republicans as an amendment to the economic stimulus bill earlier this month. In the GOP plan, the government would have spent tens of billion dollars to provide a $15,000 tax credit to any person who buys a home in 2009. Republican Senate leaders touted their amendment as a way to ‘fix housing first.’
Critics of the GOP alternative pointed out, however, that the GOP proposal essentially would have guaranteed a profit of at least $15,000 to real estate speculators seeking to take advantage of low prices on foreclosed homes. called the plan a ‘housing flipping subsidy’ that would have ended up costing about $75 billion and would have done nothing to fix the underlying problems in the housing market.
The Obama plan won immediate praise from progressive groups. ACORN, which has developed a to help families keep their homes, described the housing package as an ‘urgent sequel’ to the economic stimulus package.
‘Finally, a President who is a friend of homeowners when it counts,’ exclaimed Bertha Lewis, ACORN CEO, in a Feb. 18th statement. ‘With 8 to 9 million Americans on the verge of losing their homes in the next four years, the nation’s housing crisis demands leadership commensurate with its enormous scale, and we got that today from the Obama administration.’
Lewis pressed further, however, for a moratorium on foreclosures until the Obama plan could take effect. ‘There should not be a single foreclosure on any family that could benefit from this comprehensive housing plan, so we need a thorough, binding moratorium,’ she said.
Associate Director of the Center for American Progress’ Economic Mobility Program Andrew Jakabovics added, Obama’s plan is ‘light years ahead of anything we saw coming out of the Bush administration.’ He saw Obama’s plan as ‘systematic’ and ‘sufficiently comprehensive’ to stem the tide of foreclosures.
According Jakabovics, the only part of Obama’s plan that would need congressional approval is the proposed change to bankruptcy law. Other parts of the plan can be put in place through rules changes ordered by the administration as authorized previously by Congress.
The Obama administration predicted that the effects of the plan could be seen very quickly.
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