by Wayne D. King
While there are always going to be critics of any plan conceived in the tenuous - some say toxic - economic environment we face today, Obama's Foreclosure Prevention plan takes a carrot and stick approach that leverages every asset that can responsibly be brought to bear on the crisis.
It is a fair responsible and far reaching approach that provides help to those least responsible for the fix that they find themselves in. It goes further than any plan proposed to date to help those struggling but sidesteps a bitterly divided Congress to achieve its goals without requiring specific action from Congress. According to the Los Angeles Times. it "embraces strategies that attack the complex problems on several fronts but without requiring a long struggle in Congress".
Who the Plan Doesn't Cover
Irrespective of the tirade by CNBC's
Rick Santelli the plan does not cover those who knowingly gamed the system; the folks who got loans on homes with values substantially more than they were actually qualifies for or lied about their income. It also does not cover many of those who were lied to by their mortgage lender because in most cases those folks are so deep underwater that they just can't be helped.
Who the Plan Helps
Homeowners with moderate declines in Loan to Value equity. The so called "Underwater" loans. These homeowners fall within a specific loan to value ratio that makes it resonably likely that they played by the rules originally but that declining housing values have now wiped out their equity to the extent that a bank would no longer consider their loan to value ratio reasonable.
To be eligible,
borrowers must live in their homes and have a loan that is owned or guaranteed by Fannie Mae or Freddie Mac.
According to Housing Secretary Shaun Donovan, the opportunity to refinance will help "homeowners who have played by the rules . . . have been making their payments on time but have been unable to refinance because falling housing prices have eroded the equity in their homes."
The second part of the plan is focused on homeowners who are considered to be "at risk" but where action now can prevent a future foreclosure. For example, this part of the plan would apply where a family member has been laid off or family income has been reduced for some other reason. In this instance, the plan offers incentives to lenders and mortgage servicers to modify the terms of the loan to enhance the ability of the family to remain in the home.
For example: Where a family member has been laid off and family income has been reduced a refinancing of the loan at a lower interest rate might make the loan affordable for the family. However, the bank has little incentive to refinance the loan. The Obama plan provides financial incentives to the bank to rewrite the loan and in some cases a guarantee on the re-written loan.
If the lender agrees to reduce the monthly payment to 38% of a borrower's monthly income, the government will pay half of the additional cost of lowering the payment to 31% of the borrower's income.
One of the most powerful features of the Obama plan, and a feature that is different from past foreclosure prevention efforts, is that it does not require that a borrower be delinquent to qualify, in fact the program will pay loan servicers a HIGHER incentive fee if modification is done before the borrower falls behind.
According to Sheila Bair of the Federal Deposit Insurance Corporation, this focus on "at risk" borrowers is the most powerful feature of the Obama plan in terms of strengthening the overall economy because it will prevent unnecessary foreclosures that would further weaken the already troubled housing market.
Here's the catch - if there is one - banks and other lenders do not have to participate, unless they have previously received TARP funds. Since the vast majority of banks have not received funds, because they acted responsibly in their lending practices to begin with they are, understandably, not required to participate. However, their participation could have a significant impact on the overall health of the housing market - and thus the economy - of their area. Professional associations such as Chambers of Commerce and Realtors associations would do well to bring their influence to bear on their local institutions.
Finally there is an additional "stick" incentive pending that will require action by Congress. enerally the Obama administration is working on making changes to the bankruptcy laws that will allow a bankruptcy judge to "write down" a home mortgage as part of a bankruptcy settlement. Assuming that something like this will be adopted by Congress, banks and lenders will have an additional incentive to help prevent homeowners from having to take the extraordinary step of filing for protection under the bankruptcy codes.
Fast action by business and professional associations and an affirmative response by banks and other lenders could have a ripple effect building a wave of change and better economic times for the country as a whole.
The protocols for the plan will be issued on March 4.
Resources: Well Written summaries of the proposal and related issues:
Obama's Housing Bailout Draws Comparisons to McCain's PlanFOXNews - Feb 19, 2009President Obama's $275 billion housing bailout plan, aimed at halting mortgage foreclosures, is drawing comparisons to a proposal championed last year by John McCain
Los Angeles TimesObama Throws $75 Billion Lifeline To HomeownersMSNBC - Feb 19, 2009By AP MESA, Ariz.—President Barack Obama threw a $75 billion lifeline to millions of Americans on the brink of foreclosure Wednesday, "The Garden in My Mind" 2009 Calendar
Click here to view the calendar
While there are always going to be critics of any plan conceived in the tenuous - some say toxic - economic environment we face today, Obama's Foreclosure Prevention plan takes a carrot and stick approach that leverages every asset that can responsibly be brought to bear on the crisis.
