Obama’s Plan to Rescue Mortgages

February 23rd, 2009 • Related • Filed Under • by Debbie Dragon

The national foreclosure rate is not showing any sign of slowing down. Millions of Americans are at risk of losing their homes to foreclosure. On February 18^th, President Barack Obama announced a plan meant to stabilize the faltering housing market. Up to 9 million families would be able to refinance or restructure their current mortgages (at risk for foreclosure) with a $75 billion homeowner stability initiative combined with other incentives designed to keep homes from foreclosing. Foreclosures have an impact on the entire community and reduce the price of all homes in the area. The plan is already labeled as the “backyard bailout” by many.

The plan would help homeowners refinance mortgages at lower interest rates to avoid foreclosure. If refinancing doesn’t prevent foreclosure, the plan will then provide incentives for lenders and borrowers to stick to a new financial agreement, which involves lowering payments to a more affordable figure for the homeowner.

The “Homeowner Stability Initiative”

This plan is made up of three elements:

Allow up to 5 million homeowners who’s home values have declined to refinance through a government-sponsored mortgage entity (Fannie Mae or Freddie Mac)
$75 billion for up to 4 million home owners to restructure and modify their subprime mortgage loans to keep their monthly payments below 31% of household income through incentive payments made to the lenders who agree to modify the mortgage.
Providing market confidence for Fannie Mae and Freddie mac by doubling governments investment to $200 billion each for these companies, increasing the size of their retained mortgage portfolios.

The total cost for a mortgage rescue plan is in the hundreds of billions of dollars – and considering the Recovery and ReInvestment Act has just been signed into law for $787 billion, there are major concerns regarding the funding for the plan and what kind of results it will actually provide over the long term.

When a home is foreclosed, the national economy is hurt – but even more troubling is how badly it hits state and local governments. The local and state governments rely on property taxes as a major source of their revenues and when foreclosures begin occurring, the home values for the entire neighborhood decrease, and result in lower assessed values and lower tax income.

As with Obama’s last plan, the mortgage rescue plan is getting mixed reviews, with some state governors fighting it as they consider it a bad idea – one that rewards irresponsible behavior. Some governors don’t feel the federal government should be involved in restructuring mortgages, while others feel that struggling homeowners deserve the same type of help that failing banks have been receiving recently. Obama and supporters of this new plan feel a mortgage “bail out” will help turn the economy around and keep more American’s in their homes.