President Obama today turns his attention to what may be the biggest drag on the American economy: housing. The goal of the administration's plan is simple, according to sources familiar with it: prevent avoidable foreclosures. So who gets help first? Homeowners who owe more than their house is now worth. Currently, they can't refinance. This plan will allow them to either refinance at a lower interest rate, extend the life of the loan, or both. The government will subsidize mortgage companies who work with these eligible, yet vulnerable, homeowners. So instead of a borrower trying to "buy down" an interest rate by a couple of points themselves, the government will do the buying down of the interest rate. If a lender won't help a qualifying homeowner, the government will ask Fannie Mae or Freddie Mac to step in.
Also at the top of the list for help in this plan: homeowners who have a very poor debt-to-income ratio, meaning their current income won't support the amount of debt they have acquired. What the exact cut-off line is for this group of homeowners is not yet clear, but the goal is getting the cost of staying in one's home no more than 30% of their monthly income.
One thing the plan won't do is allow borrowers to get their entire loan amount reduced.
There is still plenty we don't know yet about the plan, including:
-- how will mortgages be handled in bankruptcy proceedings? The plan MAY make it easier for bankruptcy judges to unilaterally modify mortgages -- something Republicans in Congress believe will hurt responsible borrowers by raising interest rates.
-- will borrowers who have mortgages on multiple pieces of property qualify? This could affect the so-called speculators.
-- and will mortgage companies get an increased incentive to work with troubled borrowers, including an equity stake in the property?
Politically, the White House hopes today's event is smoother than last week's phase two rollout of the bank bailout -- which is why the president is in Phoenix to unveil this. He's not leaving this task to his Treasury or Housing secretaries (although both will be with him today). Arizona had the third highest foreclosure rate in the nation last year -- behind Nevada and Florida.
The AP on Obama's foreclosure plan: "The ambitious plan he was announcing at a Phoenix high school Wednesday was expected to offer government cash to mortgage companies that reduce interest rates - and therefore monthly payments -- for homeowners in danger of default, according to several people briefed on the plan. What remained unclear was how the government will decide who qualifies for relief."