In Short..
- President Obama $75 Billion foreclosure-prevention package announced March 4 to help 9 million home owners
- Many key details of the plan will not be released until early next month.
- The three key elements of the plan are a program to allow 4 million to 5 million homeowners with little equity in their homes to refinance into cheaper mortgages; a $75 billion program to keep 3 million to 4 million homeowners out of foreclosure; and a doubling of the government’s commitment to Fannie Mae and Freddie Mac to $400 billion.
- It is the first program aimed at homeowners who are current on their loans, and it requires large banks that have received bailout money to abide by industry standards for loan modifications established by the Obama administration.
- Some of the measures Obama announced will require congressional approval. For example, creating law to allow judges to modify the mortgages of distressed homeowners, including by reducing the principal of the loan to the property’s current market value.
- Another key part of the package would loosen lending standards at Fannie Mae and Freddie Mac to allow millions of homeowners to qualify for refinanced loans as long as their mortgage does not exceed 105 percent of the current value of their property.
- To keep homeowners out of foreclosure, the program uses many incentives to encourage lenders to lower payments to affordable levels, to make helping homeowners more profitable for lenders than foreclosure.
- Under the plan, after a lender agreed to lower a borrower’s payment so that it made up no more than 38 percent of his or her income, the government would share the cost of lowering the payment further, to 31 percent of the borrower’s income.
- The plan rewards lenders with as much as $1,000 for each modification and another monthly “pay for success” fee as long as the borrowers stay current. If a lender reaches at-risk homeowners before they miss a payment and modifies the loans, the lender would be eligible for additional incentive payments.
- The program also includes incentives for homeowners. Borrowers who stay current on their mortgages after a modification would be eligible for a $1,000-a-year reduction in their principal balance.
- The modifications may provide only temporary relief for some homeowners because after the interest rate is reduced to as low as 2 percent the program is only scheduled to be available for 5 years.
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