Relief is on the Horizon?
I feel like I do a lot Obama bashing on this blog, but his $75B mortgage relief plan is probably one of the more comprehensive and effective plans that he’s set in play to counter the recession.
THE PROBLEM-As you may know, the problem right now are those adjustable rate mortgages or subprime loans lenders gave out to so many Americans who couldn’t afford them, and now that the market has tanked, those adjustable rates are resetting to the bear market. In effect, people owe more on their mortgage than their houses are currently worth and more on their subprime loans than they can afford. This has caused the escalating rates of foreclosures ruining the credit of those individuals declaring bankruptcy, along with high losses for the lenders because houses that foreclose are resold for the fire-value.
THE PLAN-
- Remove Restrictions. Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions from refinancing mortgages they own or have guaranteed when more is owed on a home than it is worth.
- Create Incentives. Create incentives for lenders to modify subprime loans at risk of default or foreclosure. For lenders that agree to reduce rates to less than 38 percent Front-End Debt-to-Income (DTI) ratio, the government will make up part of the difference between the old monthly payment and the new payment. If the lender can bring the rate down to a 31 percent Front End DTI ratio, or no more than 31 percent of a borrower’s income, they will also receive a, one time, $1,000 incentive for each individual that is eligible to meet guidelines. The lender will also receive an additional $1,000 each year the borrower stays on the program, for a period of up to 3 years. At the same time, borrowers on this program can gain $1,000 off the principle rate of their mortgage for up the five years. This doesn’t sound like a lot, but it adds up. If a lender helps just 100 people adjust their loans they receive a minimum of $100,000 free, with no strings attached; they are still loosing money but a lot less than if the person were to foreclose, especially since the federal government has agreed to help pay that individuals back-payments as well. Instead of lowering the borrowers interest rate, this program is much more effective by rewarding homeowners who make their payments with annual reductions to their principle rate.
- Keep Mortgage Rates Low. Keep mortgage rates low for millions of middle-class families seeking new mortgages. The Treasury Department and the Federal Reserve will continue to buy Fannie and Freddie mortgage-backed securities to maintain stability and liquidity in the marketplace.
- Pursue Reforms. Pursue reforms to help families avoid foreclosure. The administration will continue to support changing bankruptcy rules so judges can reduce mortgages on primary homes to their fair market value, as long as the borrower sticks to a court-ordered repayment plan.
THE PROBLEM: This situation is very complicated and I think Barack Obama’s modifications of the $75B mortgage relief plan are on the right track. However, this plan will also undoubtedly scare away investors who will no longer have any guarantees that the government won’t change their fixed rates, lowering confidence. The high level of federal spending will have also carry long-term effects, most likely high rates of inflation, if not hyper inflation, in the near future. Many opponents to the plan have criticized it as even more short-term thinking with dubious long-term effects.
Sources:
