Wednesday, February 18, 2009

How Obama's Plan Would Help My Son

As soon as I read President Barack Obama's plans to tackle the foreclosure crises, I called my son who is one of 9 million Americans faced with losing his home.

I asked if his home loan is backed by Fannie Mae or Freddie Mac, the two mortgage finance companies now owned by the government and the only ones the president has tapped to help homeowners in this phase of the housing market collapse.

He said he didn't know. The question never came up because Aurora, his original lender, has refused to negotiate refinancing terms.

My son is not alone. Billions of dollars of these loans were bundled, securitized and sold to outside mortgage investors and no one knows who is holding the paper on any individual loan.

Matt Remmers is among millions who are being foreclosed upon and known in the banking trade as being "under water." That is, they see the value of their homes as less than what they paid. Some, such as Matt, are opting to walk away and rent while at the same time recognizing their credit ratings will be strangulated for the next seven years. In my son's case, he can afford but has not made his monthly mortgage payment since October while simultaneously filing for bankruptcy.

The irony is my son is no fan of Obama. Yet, it is exactly Obama's plan that answers his plea for help -- forcing the banks to renegotiate prime and second mortgage loans. By the sheer large percentage of home mortgages backed by Freddie Mac and Fannie Mae it seems likely Matt's was too.

So help is on the way. If it's not too late.

Obama's plan announced Wednesday in Phoenix, Ariz., aims to aid borrowers who owe more on their mortgages than their homes are currently worth, and borrowers who are on the verge of foreclosure.

The initiative is designed to help up to 5 million borrowers refinance — if their mortgages are owned or guaranteed by Fannie Mae or Freddie Mac. It also provides incentive payments to mortgage lenders in an effort to convince them to help up to 4 million borrowers on the verge of foreclosure.

Headlining Obama’s plan was a $75 billion Homeowner Stability Initiative, which defines subsidies at no more than 31 percent of a homeowners income. Funding would come from the $700 billion financial industry bailout passed by Congress last fall.

Here are additional details of Obama's plan as compiled from, the New York Times, Moody's and the Associated Press.

The White House said the program will help 4 to 5 million families said to be "under water" at "roughly zero" cost to taxpayers. Of the nearly 52 million homeowners with a mortgage, about 13.8 million, or nearly 27 percent, owe more on their mortgage than their house is now worth, according to Moody’s.

The plan also seeks to bolster confidence in Fannie Mae and Freddie Mac. The White House said Treasury will be able to increase its funding commitment to the two by using money Congress set aside last year, and will continue purchasing mortgage-backed securities from them.

The two companies are currently projected to need a combined government subsidy of about $66 billion, well short of the new promise of up to $400 billion.

Treasury Secretary Timothy Geithner said in a statement that the support “will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners.” He said relief would be almost instantaneous, basically as soon as rules are published March 4.

There are two different groups of homeowners who are at risk of foreclosure. The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes.

The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are "under water". If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off.

The administration is betting that few of those 10 million "under water" homeowners will walk away. (A year from now, the number will about 15 million, Moody’s projects.) If they begin to abandon their homes in large numbers, however, they will aggravate the housing bust and the financial crisis — and probably force the administration to come up with a new, much larger housing bailout down the road.

Stay tuned whether the Obama plan can save my son from foreclosure and bankruptcy. From a father's perspective, wouldn't that be poetic justice?

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