Interesting announcement from President Obama today on the foreclosure crisis don’t you think? I believe that if executed correctly, this could be a winner and get us on the road to recovery.
In case you missed it there are four key points to the plan and the biggest point made is that “everyone will not be saved”. There are homes that will go to foreclosure, especially investors, speculators (both borrowers and lenders), folks who were pretty sure they could not make the payments but took the loan anyway will not likely benefit much.
But for many, this program will be a lifeline. If the program can be executed and that execution accomplished quickly, that is. Let’s break down the four big objectives.
- Four to Five Million upside down mortgages may be eligible to refinance. If the mortgage loan is owned or guaranteed by Fannie Mae or Freddie Mac.
This is huge because currently there is no way for people to take advantage of lower rates available today. This will save people hundreds of dollars per month and lower payments will create an incentive to stay in the home.
- Incentives to Modify. The government will be setting loan modification guidelines. This appears to be a statement to the banks who to date, have not shown a willingness to book losses through modification to get with the program. Federal guidelines limiting payments to 31% of existing income will force lenders to step up. Borrowers will have accountability. These guidelines will be official in the next two weeks and I will post them here.
- The government will keep rates low. This promise may be the toughest one to keep. With the admission that up to $200B of the Federal TARP funds may be dedicated to the purchase of Mortgage Backed Securities, the administration is making a statement that they want people to be able to secure mortgage financing at low rates. The question is, will the market agree and keep rates down?
- The threat of the Bankruptcy Cram Down. The carrot, or stick depending on your point of view is legislation allowing bankruptcy judges to “write down” principal balances on mortgages. It appears that this is currently only a threat but if the efforts to modify loans that banks are making don’t improve, we will see this enacted and it will not have good results for the banks, or home buyers going forward as rates would rise because of it.
Overall, this effort is rather impressive. The program seems to address some of the critical issues out there today creating an opportunity for people to improve their situation. Also appreciated is the accountability tone. Too often in the foreclosure/housing debate borrowers, banks, investors and Washington have been pointing fingers instead of trying to find a solution. This program could be a great step in the direction of true solutions and answers.
Watch the full announcement right here, on AmericasMortgageBlog.com
