Obama's Foreclosure Plan

Yesterday, President Obama introduced his $75Billion, three part plan in an attempt to halt the soaring rate of foreclosures. It seeks to encourage refinancing of home that are worth less than what is currently owed on them and gives incentives to lenders to do so as well.

Called the "Homeowner Affordability and Stability Plan", it seeks to provide low-cost refinancing for as many as 5 million homeowners. If it works as planned, it would help delinquent or at-risk borrowers get their mortgages modified so that no more than 31% of their income is tied up in their mortgage. It also provides financial incentives to lenders and even a new insurance program to promote more mortgage modifications.

Banks joined 2 voluntary efforts during the Bush administration, Hope for Homeowners and the Federal Housing Administration's FHA Secure, but these efforts resulted in very few homeowners actually being helped. Hope for Homeowners helped less than 1,000 people. If banks do not comply with this new program, they may be forced into it by new legislation that would give bankruptcy judges the right to modify loan terms of mortgages, which is currently forbidden. Banks are against this legislation warning that it will bring uncertainty for lenders, who will respond by restricting already tight mortgage lending.

Under the new plan, borrowers who have stayed current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15 year fixed rate loan. Eligible loans would now include those where the new first mortgage (including refi costs) would not exceed 105% of the current market value of the property. Complete eligibility details will be announced on March 4th when the program starts.

This plan is not designed to lower the amount of debt owed on a home, only to make the payments more affordable by lowering interest rates for those that are in higher interest loans. It is also going to be available only to owner occupants, not 2nd or 3rd vacation homes or rental homes etc.