Smart Borrower Blog

Obama Announces Details of New Housing Plan

President Barack Obama announced the details of his $75 billion plan Wednesday to help roughly 9 million struggling homeowners avoid foreclosure.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly, by refinancing loans for millions of families in traditional mortgages who are underwater or close to it,” he said in a speech at an Arizona high school.

The funding for the Obama plan will come from the $275 billion stimulus package announced last month. It focuses on two major objectives. The first is to aid homeowners in refinancing into new, affordable mortgages, and the second is to give lenders enough incentives to start voluntarily working with borrowers to modify their loan terms.

While not able to help all mortgage borrowers, the government refinancing portion of the plan can help those homeowners refinance who currently have mortgages within the conforming loan limits and which are owned by the government subsidiaries Freddie Mac or Fannie Mae. This effort can help those who are underwater but only by 5 percent. In other words, the loan-to-value ratio must not exceed 105 percent.

The mortgage modification program will be able to assist homeowners who hold mortgages originated before January 1, 2009 and the home loan balance must not be greater than $729,750. The lenders will voluntarily reduce the borrower’s monthly payment to 31 percent of his or her income, and the government will subsidize a portion of this payment reduction. Lenders can lower payments by reducing the interest rate to 2 percent or less, increasing the loan length, or writing down the principal.

While the top five mortgage and banking lenders in the country have already endorsed the Obama plan, many are skeptical of its promised effects. Some worry that the government is overstepping its bounds by bailing out individual homeowners, rewarding and encouraging poor choices and undermining consumer responsibility.

On the other end of the spectrum, some are concerned that the presidential plan has not gone far enough in helping homeowners facing foreclosure. All participation in the program is still voluntary, meaning there are no guarantees that lenders will participate. Additionally, Freddie and Fannie own roughly half of the mortgage loans in the country but the other half will not be eligible for rescuing under the current plan.

Nevertheless, President Obama promised that this plan, while not saving every home from foreclosure, will prevent "the worst consequences of this crisis from wreaking even greater havoc on the economy.”