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February 4th, 2009 1:24 AM

Obama unveils plan to prevent foreclosures

February 19th, 2009 8:38 AM

President Barack Obama unveiled plans Wednesday to help up to 9 million homeowners restructure or refinance their mortgages to avoid foreclosure.

The plan will enable as many as 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance their mortgages through those institutions. Under current rules, refinancing is not an option for most homeowners who owe more than 80 percent of the value of their homes.

Removing this restriction “will allow millions of families struck with loans at a higher rate to refinance,” Obama said. “And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.”

An additional 3 million to 4 million homeowners will be able to avoid foreclosure through a new $75 billion mortgage modification program. The Homeowner Stability Initiative will be available to homeowners who are at imminent risk of default, even if they are now current on their payments.

Lenders will be responsible for reducing interest rates on these loans so the monthly payment would be no more than 38 percent of the homeowner’s income. Government funds would match further reductions in interest rates to bring the payment down to 31 percent of income.

“If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, we’ll make up part of the gap between what the old payments were and what the new payments will be,” Obama said in a speech to be delivered Wednesday in Phoenix.

Mortgage servicers would receive an upfront fee of $1,000 for each loan modification that meets the program’s guidelines and would continue to receive up to $1,000 a year in fees for three years as long as the borrower remains current on the loan.

Servicers also will receive a $500 bonus if they modify at-risk loans before they fall behind. Mortgage holders will receive a $1,500 bonus to do this.

The Treasury Department will create an insurance fund of up to $10 billion to compensate mortgage holders if home prices decline. This is designed to discourage lenders from foreclosing on mortgages out of fear that housing values will decline later.

Under this mortgage modification program, the federal government also will pay up to $1,000 a year for five years to reduce the principal on homeowners’ mortgages, as long as they remain current on the loans.

“By making these investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow -- costs borne not just by families with troubled loans, but by their neighbors and communities and by our economy as a whole,” Obama said.

The Treasury Department also will develop uniform guidelines for mortgage modifications. Any lenders that receive financial assistance from the government will be required to follow these guidelines, as will Fannie Mae and Freddie Mac. The administration will work with federal and state agencies to implement the guidelines across the entire mortgage market.

The federal government will provide up to $200 billion in additional capital to Fannie Mae and Freddie Mac so that those institutions, which back most new home loans, “can continue to stabilize markets and hold mortgage rates down,” Obama said.

The president also endorsed legislation that would allow bankruptcy judges to reduce the principal on homeowners’ mortgages.

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