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Massive Foreclosure Plan Unveiled

Homeowner Affordability and Stability Plan unveiled by Obama administration

February 18, 2009

By MortgageDaily.com staff


The Obama administration plans to throw $75 billion at the country's foreclosure problem. As many as 9 million mortgages could be impacted, including conforming loans that have been paid on-time and at-risk mortgages. The plan -- which could be a boon for laid-off mortgage employees -- includes loan-to-value exceptions on conforming refinances, bankruptcy cramdowns and cash payments for successful modifications.

The Homeowner Affordability and Stability Plan was announced today by the U.S. Department of the Treasury. The program starts on March 4, at which point details about eligibility will made available.

The Treasury indicated that 4 million to 5 million borrowers with LTVs between 80 and 105 percent who have made on-time payments on loans managed by either Fannie Mae or Freddie Mac will be able to refinance to at today's lower rates. Borrowers with second mortgages are eligible as long as the first mortgage doesn't exceed 105 percent.

In addition, the plan includes a $75 billion initiative to support modifications that lower mortgage payments for between 3 million and 4 million at-risk borrowers primarily with subprime and exotic loans. Only owner-occupied one- to four-unit properties will be eligible. Borrowers who have paid as agreed but are at risk of imminent default will also benefit from this initiative.

"Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels," the Treasury said.

That goal will be reached by first requiring lenders to reduce the interest rate or loan balance to a level that brings the debt-to-income ratio down to 38 percent. The government would then match further reductions by lenders so that the ratio is reduced to 31 percent. The rate can be gradually increased again after five years to conforming rates at that time.

Servicers will receive a $1,000 up-front fee for each qualified modification completed and $1,000 each year for up to three years as long as the modified mortgage remains current. In addition, if the modification is completed before the loans becomes delinquent, the servicer will receive a $500 incentive and the mortgage holder will receive a $1,500 incentive.

Borrowers will also receive a $1,000 reduction to their principal balance each year they stay current for up to five years.

The Treasury will work with the Federal Deposit Insurance Corporation to create a $10 billion fund to subsidize lenders for losses on modified loans if home prices decline. This move is designed to eliminate the motivation for servicers to foreclose sooner because home prices might fall further.

Using the FDIC's streamline modification program as a template, the Treasury said it will develop uniform modification guidance for the foreclosure prevention plan. The guidelines will be mandatory at government agencies, government sponsored enterprises and any financial institutions that receive future federal assistance.

The Treasury said it also hopes to impact foreclosures by allowing judicial modifications of mortgages for bankrupt borrowers with no other options and by improving the flexibility of the Hope for Homeowners program.

"We must stem the spread of foreclosures and falling home values for all Americans, and do everything we can to help responsible homeowners stay in their homes," President Barack Obama said in a statement posted on the White House's Web site.

The nation's financial institutions support foreclosure prevention.

"We agree with the emphasis on support for preventing foreclosures, as we have previously testified, since housing and foreclosure issues are still at the core of our economic problems," the American Bankers Association said in a statement Tuesday.

Mortgage bankers were unhappy with the lack of help on loans with LTVs above 105 percent, the exclusion of jumbo mortgages from the plan and inadequate safe harbor for servicers, a statement from the Mortgage Bankers Association said. The cramdown provision also disappointed the trade group.

"In the end, we all agree with the overarching goal of helping at risk borrowers get an affordable monthly mortgage payment," MBA President and Chief Executive Officer John Courson said in the statement.

The Treasury's program will utilize funds from the Troubled Asset Relief Program and rely on the "the full strength of Fannie Mae and Freddie Mac."

As a result of the Homeowner Affordability and Stability Plan, mortgage companies will shift salespeople to loss mitigation departments, management consultant and analyst Dr. Danielle Babb told MortgageDaily.com in a statement. She is the Dean for Andrew Jackson University School of Business and is also a foreclosure and online business professor at the University of California, Irvine.

photo of Barack Obama
White House photo
of Barack Obama

In addition, Babb noted that many former employees with refinance experience will be rehired. She said employees will need to retrained to understand the new rules.

The plan is also expected to increase demand for mortgage-backed securities -- pushing prices higher, Babb said.

The stock market stood firm after the plan was announced, with the Dow Jones Industrial Average more than 10 points higher in late trading after being down more than 70 points earlier today.

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