Obama Housing Plan Seems to be Working
In mid February 2009 President Obama unveiled a $75 billion multi-pronged plan that seeks to help up to 9 million borrowers suffering from falling home prices and unaffordable monthly payments. The plan will make it easier for homeowners to afford their monthly payments either by refinancing the mortgages or having their loans modified. The president is vastly broadening the scope of the government rescue by focusing on homeowners who are still current in their payments but at risk of default. And he puts billions of federal funds into enticing servicers to modify the loans of those who've already stopped paying.
While still voluntary, the program contains a mix of carrots and sticks for mortgage servicers and investors, both of whom have been seen as resistant to modifying loans. The Making Home Affordable plan uses a combination of carrots and sticks aimed at improving industry activity. First, if a mortgage servicer takes a delinquent borrower’s total housing costs from their unaffordable current level down to 38% of the borrower’s income, the federal government will share the cost of reducing payments further to 31% of income. This truly affordable level of payment will dramatically reduce re-defaults and the corresponding loss, the high rates of which have stemmed from industry “modifications” that often do not even reduce monthly payments. Second, the federal government will provide direct cash incentives to mortgage servicers for modifications they perform, including extra incentives for modifying loans that are not yet in delinquency but which are likely to eventually default because of a structural lack of affordability. Many Pooling and Servicing Agreements (PSAs) that govern the servicing of securitized mortgages pay servicers per foreclosure and for servicing delinquent loans but have no counterbalancing payments per modification or for succeeding at keeping loans current.
Any mortgage servicing company utilizing the incentives provided under the Obama plan, or any company that takes a taxpayer bailout going forward, must agree to be bound by loss mitigation guidelines. Loss mitigation is the industry practice of weighing the value of a foreclosed home against the value of a modified mortgage in determining which option is least costly to investors. Adequate loss mitigation analysis has not been performed in the vast majority of current foreclosure activity, which is costing investors significant amounts of money and fueling the foreclosure crisis that is wreaking havoc on the economy. In the FDIC’s precedent-setting work with the IndyMac mortgage portfolio, affordable loan modifications offered to homeowners were on average $50,000 less costly than a foreclosure. With the logical “net present value” test included in the Administration’s loss mitigation guidelines, the industry now has a clear and consistent economic standard to meet prior to foreclosing on homes.
The administration also will work with Congress to amend bankruptcy laws to allow judges to modify mortgages, a step community advocates say is badly needed but that the financial industry abhors.
In a speech in Mesa, Ariz., a community hit hard by the mortgage meltdown, seeking to drum up support from those who are paying their debts, Obama laid out how foreclosures hits more than just the troubled borrower. Obama said that the downturn in the housing market has claimed many companies and jobs. This, in turn, has hurt state tax revenues, which means less money for schools and other public services. And, he said, it has made it harder for everyone to get credit. "In the end, all of us are paying a price for this home mortgage crisis," Obama said. "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. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit. "The administration, is marketing its plan as help for "responsible homeowners".
Much of the industry is already moving quickly to implement the guidelines, while others are biding their time. To gauge and quantify the progress that has been made thus far, ACORN (Association of Community Organizations for Reform Now) conducted a census of mortgage servicers to determine whether they are participating in the plan, whether they are implementing it immediately, and whether they will cease foreclosure activity to evaluate the homeowners’ eligibility for assistance. The survey found that at least 76% of outstanding mortgage loans are serviced by companies who have committed to implementing the Obama plan. ACORN expects further progress in the coming weeks. In ACORN’s analysis, this industry momentum signals strongly that the Obama plan will achieve near-universal industry consensus on foreclosure prevention protocols in short order.
See a copy of the whole ACORN report, "Hope on the Horizon", by clicking here.
-Adapted from: “Obama: Aid 9 million homeowners: Wide-ranging $75 billion plan will use government money to subsidize rates and insure servicers against falling home prices. By Tami Luhby, CNNMoney.com senior writer. First Published: February 18, 2009.
http://money.cnn.com/2009/02/18/news/economy/obama_foreclosure/index.htm?postversion=2009021809 retrieved 3/30/09. Also “ Hope on the Horizon: Mortgage Industry Warming Quickly to Obama Foreclosure Reduction Plan” , ACORN Alerte-mail, March 18, 2009; and “ HOPE ON THE HORIZON • Mortgage Industry Warming Quickly to Obama Foreclosure Plan”
( http://www.acorn.org/fileadmin/ACORN_Reports/2009/Hope_on_Horizon_Report.pdf retrieved 3/19/09.)
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