President steers $275b to housing
Funds aimed at foreclosures, mortgage rates
President Obama unveiled a $275 billion plan yesterday to help as many as 9 million homeowners avoid foreclosure and keep mortgage rates low in the most aggressive effort yet to stabilize the US housing market.
Warning that doing nothing would cost all Americans, Obama presented a three-part plan that contains $75 billion to help modify loans for as many as 4 million struggling homeowners, a change in mortgage rules to help as many as 5 million homeowners refinance into lower-cost loans, and a pledge of $200 billion to bolster mortgage giants
Housing advocates praised the plan as ambitious, with cash incentives to lenders and borrowers to help stop the bleeding that has left nearly 10 percent of US homeowners either in foreclosure or behind on their mortgages. The plan, which uses federal money that was previously authorized, incorporates many proposals suggested over the past six months as the housing crisis has worsened.
"It's bold, and the amounts of money they set aside are large and important," said Barry Zigas, director of Housing Policy for the national advocacy group the Consumer Federation of America. "I hope . . . that it will have a significant impact on the market."
Obama said the so-called Homeowner Affordability and Stability Plan aims to "arrest the downward spiral" in the housing market that has crippled the US economy and spurred a credit crunch. He said the plan aims to rescue families who have played by the rules but are struggling to save their homes either because their property values plunged or because they bought unmanageable subprime loans.
"In the end, all of us are paying a price for this home mortgage crisis," Obama said at a high school in the Phoenix suburb of Mesa. "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. But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit."
Obama also voiced his support for a controversial plan to reform bankruptcy rules to allow judges to reduce the amount owed on the mortgages of primary residences. The president backs the effort, already allowed for investors with multiple homes, as an alternative to foreclosure. Opponents of the bankruptcy provision say it would put into question the value of a home and push up mortgage rates.
Representative Barney Frank, chairman of the House Financial Services Committee, said the House plans to consider a housing package next week that would include the bankruptcy legislation. The Massachusetts Democrat also lauded the president's plan: "It will have a very significant effect in reducing foreclosures. . . . This is precisely the decisive action we need."
Meanwhile, more banks said they would temporarily halt mortgage foreclosures to wait for the federal efforts to get underway. Yesterday three big banks in Massachusetts said they have suspended foreclosures, at least for a few weeks, including Citizens Bank parent Citizens Financial Group of Providence;
The Obama administration will issue more details about its plan on March 4, including who is eligible, when the program starts.
To help the people most at risk of losing their homes, Obama allotted $75 billion to fund a series of incentives so that mortgage servicers would change loan terms to make them more affordable. Mortgage servicers will get a $1,000 upfront bonus for each borrower they help under the new guidelines.
Servicers would receive a "pay for success" fee of an additional $1,000 a year for three years if the borrower stays current on a loan. Borrowers in the program also could qualify for an incentive, earning up to $1,000 a year for five years if they continue to pay their mortgage on time.
The administration plans to help lenders reduce rates through a federal matching program. Lenders would be responsible for bringing down rates so a borrower's mortgage payment would be no more than 38 percent of income. The government would then match further reductions in interest payments with the lender to bring the ratio to 31 percent.
Government officials said $50 billion of the money comes from the Troubled Asset Relief Program, which Congress approved last year, as well $25 billion from Fannie Mae and Freddie Mac.
The Obama plan also offers relief for those who want to refinance but can't because their property values have dropped. The plan would change rules so that homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac - the country's largest mortgage holders - could refinance as long as their first mortgage was less than 105 percent of the property's value. For example, if your home is worth $200,000 but you owe $210,000, you may qualify for refinancing under the program.
Currently, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing into lower rates. About 28 percent of Boston area borrowers who bought homes within the last five years are "underwater" or have mortgages that are larger than the value of their properties, according to real estate tracker Zillow.com.
Finally, Obama pledged to increase confidence in the mortgage markets by using funds Congress authorized last year to provide additional backing for Fannie Mae and Freddie Mac, which were taken over by the government in September. The Treasury Department is increasing its "preferred stock purchase agreements," sometimes described as a credit line, from $100 billion to $200 billion for each company in order to quell worries about their solvency.
"If the expanded program removes questions about solvency, then their borrowing costs will go down and that will be passed down to lower mortgage rates," said Brian Bethune, chief US financial economist for IHS Global Insight.
Obama's plan received some criticism, including concern from House Republican leader John Boehner of Ohio, who said there are many unanswered questions in the proposal. Questions included why taxpayers should reward Fannie Mae and Freddie Mac, firms that he said were at "the heart of the economic meltdown." The firms have been criticized as being lax with lending rules.
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., who had clashed with the Bush administration over how to solve the housing crisis, lauded the effort.
"President Obama gets to the heart of the main problem facing our economy - fixing the housing market," said Bair, a former professor at the University of Massachusetts at Amherst. "A comprehensive approach is the strong medicine that the country has been waiting for. It gives hope to millions of responsible homeowners who are facing foreclosure."
Ross Kerber of the Globe staff contributed to this report. Jenifer B. McKim can be reached at jmckim@globe.com. 