Wednesday, February 18, 2009

Obama's Mortgage Plan is not a Bail Out

Here's the first take on the President's Market Incentive Mortgage plan.

1. It establishes a $75 billion dollar fund to reduce home owner's monthly payments
2. It provides Fannie Mae and Freddie Mac with a $50 billion dollar increase ($900 billion) in mortgage backed securities.
3. It develops uniform rules for loan modifications across the mortgage industry
4. It allows 4 to 5 million homeowners to refinance if their loans are owned by Fannie Mae or Freddie Mac

The plan allows homeowners who are current on their payments to refinance their mortgage rate -- but haven't been able to because they don't have 20% equity in their home, not because they borrowed too much, but because the value of their home plummeted durring the financial crisis.

These families are not in immediate danger of losing their homes unless they've lost a job, gotten sick or been injured or are recently divorced.

The second part of the plan allows homeowners who borrowed a bit too much or have recently experienced a decrease in earnings because they have an adjustable rate mortgage or some other industry hybrid.

These homeowners are now paying 40 to 50% of their incomes on housing and are still current on their payments. For these homeowners, the government will subsidize a lower interest rate so homeowners can bring their payments down to an affordable level. The lender will pay 1/2 of the lower rate and the government will pay the other 1/2.

Analysts tell us the plan is good for lenders, because they will be foreclosing on fewer homes and it will be good for the taxpayer because fewer foreclosures provide stability to the stalled housing market.

For lenders who are unwilling to write down the interest rate, the government can rewrite bankruptcy laws to allow judges to modify the terms of a loan.

The plan rewards borrowers who participate in the loan modification program with a $1,000 each year to apply against the loan's principle. Lenders who agree to modify loans will get cash payments and reduced housing market declines.

For homeowners who have acquired large debt due to accidents, serious illness, a death in the family or other adverse circumstances -- the government has nothing for you at this time.

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