News Analysis: Obama Housing Plan (William Chirolas)

  The Obama administration estimates that the plan will keep 7 million-9 million people from foreclosure

  William Chirolas -- World News Trust

  Feb. 18, 2009 -- Using $50 billion coming from the remaining $350 billion in Troubled Asset Relief Program funds (TARP), and $25 billion coming from Fannie Mae and Freddie Mac, the Obama plan for those homeowners whose loans are current as well as those homeowners who are deliquent, called the Homeowner Stability Initiative, will provide a FHA/Fredie Mac change that takes effect March 4 when the new rules are published, plus subsidies to lenders that participate in a voluntary loan modification program.

  Following the Obama plan rules and participating in the plan is mandatory for those lenders that have received funds from the $700 billion TARP -- Troubled Assets Relief Program.

  1.  The 80 percent loan-to-value requirement for refinancing a FHA/Fredie Mac loan into a new FHA/Fredie Mac loan is removed -- loans can be as much as 100 percent of the value of the home. These refinancing loans will be at current market rates -- currently around 5%.  While it is clear that the refinanced loan can not exceed the current FHA/Freddie Mac limit of $729,750 in high cost areas, there was worry that the the new refinancing would be capped at the old loan limit of $417,000. The current 5 percent rate may be driven lower, as it was Jan. 5, when the Federal Reserve Bank of New York began purchasing fixed-rate mortgage-backed securities in an effort to bolster the battered housing market.

  2.  The loan modification program will, with government subsidies to lenders and borrowers, involve lenders reducing the interest rates (for a minimum of five years) so as to produce a monthly mortgage payment that is no more than 38 percent of a borrower's pre-tax income. The government would then subsidize a further reduction to bring the homeowner's payments down to 31 percent of their pre-tax income.  Lenders can choose to either reduce the homeowners mortgage payment with an interest rate reduction, or a loan principle reduction. The government will share in the cost, up to the amount the servicer would have received if it had reduced the interest rates.  The loan modification period must be for a minimum of five years.

  3.  The government's investment in FHA/Fredie Mac will increase to $200 billion from the current $100 billion (the 2008 estimate of the FHA/Fredie Mac mortgage loses was $65 billion) and the government also doubled to $400 billion its commitment to backstop Fannie Mae and Freddie Mac's losses on mortgage investments. Treasury will increase the size of Fannie and Freddie’s permitted retained mortgage portfolios to a $900 billion limit that will become part of the preferred stock agreement included in the September federal takeover of the two mortgage-finance companies.

  4. There is also a separate renters program to help renters displaced by foreclosure to relocate, costing $1.5 billion, and a $2 billion program to stabilize neighborhoods with high levels of foreclosure

  House Republican leaders, in a letter sent Wednesday morning to Obama about the housing plan, stated their party still wants to cooperate with the president, but they had six questions they wanted answered, including clarification on whether borrowers who misrepresented their income or assets would be eligible for government assistance under the plan,

  Obama plans to package the plan within a larger housing bill that lets bankruptcy judges alter mortgages (the excess of the mortgage over the matket value of the home becomes unsecured debt in the bankrupcy) and lower interest rates for troubled homeowners. Such a bankruptcy provision requires legislative approval on Capitol Hill.

  The Obama administration estimates that the plan will keep 7 million-9 million people from foreclosure. Many of those whose mortgage is more than the home is now worth (Of 52 million U.S. homeowners about 13.8 million are thought to be "underwater") will be unable to rescue themselves with this plan, as their income, even with a five-year loan modification, can not support the mortgage.

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  William Chirolas brings 40 years of real-world business experience in local, state, national, and international tax, pensions, and finance to the world of blogging. A graduate of MIT, he calls the Boston area home, except when visiting kids and grandkids.