WASHINGTON — President Barack Obama's new effort to use Wall Street rescue money to halt the soaring rate of mortgage foreclosures nationwide encourages refinancing of homes that are now worth less than their mortgages and provides incentives for lenders to lower the debt load on struggling homeowners.
Like the failed efforts under the Bush administration, however, Obama's $275 billion plan — announced on Wednesday — doesn't compel banks and other lenders to modify troubled mortgages. Instead, it provides a menu of incentives that may or may not prove sufficient in reaching the goal of helping 9 million homeowners.
"It's a bold plan and that's encouraging. But at this moment, we don't have enough detail, and unfortunately with the foreclosure mitigation plans, the devil is in the details," said Elizabeth Warren, a Harvard University law professor who heads the Congressional Oversight Panel charged with monitoring use of taxpayer bailout funds. "There have been big headlines in the past and the details never caught up with the early promises."
The Homeowner Stability Initiative, unveiled in a rowdy high school gym in Phoenix, seeks to address one of the triggers of the global financial crisis: the 2.3 million U.S. foreclosures last year that are protracting the housing crisis and helping to drive down home prices across the nation.
"When the housing market collapsed, so did the availability of credit on which our economy depends. As that credit dried up, it has been harder for families to find affordable loans," Obama said. "In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself."
His plan has three major components.
First, it seeks to provide low-cost refinancing for as many as 5 million Americans who aren't behind on mortgage payments, at least not yet. If a bank agrees to issue lower-interest loans to homeowners who are current on payments, the loans could be sold to Fannie Mae and Freddie Mac, which were seized by the government in September.
The idea here is to allow access to refinancing for homeowners who don't have much equity in their homes, or owe up to 5 percent more than what their homes are worth. These borrowers can't qualify for refinancing under Fannie's and Freddie's current rules, and the change could result in savings on mortgage payments up to $2,300 a year. For lenders, it also would generate a new stream of revenue from refinancing charges and help put a floor under declining home prices.
A second leg of the plan makes another $200 billion available for mortgage finance. The Obama plan doubles earlier $100 billion agreements with Fannie and Freddie to provide a government subsidy to purchase mortgages from banks and other lenders.
The third and trickiest leg of the Obama plan involves using $75 billion in Wall Street rescue funds for a shared effort to help as many as 4 million distressed borrowers who are behind on their payments or facing foreclosure. Obama wants lenders to lower interest rates and extend the length of loans to make monthly mortgage payments no more than 38 percent of borrowers' after-tax income.
Then, the government will step in and split the cost, dollar for dollar, to buy down those monthly payments until they account for no more than 31 percent of borrowers' after-tax income.
Obama committed to publishing standardized guidelines for mortgage modifications and additional detail by March 4 — an aggressive timetable.
"This sounds good but I'd have to see more," said Harlan Platt, a finance professor at Northeastern University in Boston. Platt has proposed an even more ambitious plan that would involve more aggressive write downs for banks in exchange for a greater percentage of gains when home prices rebound.
The third leg of Obama's plan wouldn't be a permanent fix, but a five-year subsidy designed to stem the rising tide of foreclosures.
"It recognizes that we've got to stop foreclosures, not just for families about to lose their home but anybody who owns a home" and is seeing home price declines, said Ellen Harnick, the senior policy counsel for the Center for Responsible Lending, an advocacy group in Durham, N.C.
Consumer advocates applauded Obama's plan. The response from lenders — which would receive $1,000 payments to refinance mortgages, a $10 billion insurance program and other financial incentives — was lukewarm at best. Republicans sided with banks.
"Among the concerns we have is that it seems to offer little help to borrowers whose loan exceeds their property value by more than 5 percent. This will limit the plan's success in some of the hardest hit areas in California, Florida, Nevada and Arizona, as well as some areas on the East Coast," said John Courson, the president of the Mortgage Bankers Association, in a statement.
Obama's answer to that complaint riles lenders. If lenders aren't willing to write down some of those so-called underwater mortgages, he said Wednesday, bankruptcy courts may soon be able to do so. This is called a mortgage cram-down. Obama supported congressional efforts to authorize bankruptcy judges to write off the difference between what a borrower owes and the home's value.
"Mortgage cram-down is clearly a stick forcing investors to recognize their losses on bad mortgages. I think it's a critical component," said Warren, the Harvard professor. "By itself it won't solve the housing crisis, but it is a critical component."
Banks maintain that this will raise the cost of borrowing for homeowners, and the House Republican leader, Rep. John Boehner of Ohio, echoed that view on Wednesday.
"Should a responsible plan include a 'cram-down' provision that could increase the monthly mortgage payments for responsible borrowers?" he asked in a statement.
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