Obama Housing Plan to Help Diminish Foreclosure Rate

The new Obama housing plan, announced today, will help homeowners refinance loans and lower monthly payments. Bloomberg reports:

U.S. President Barack Obama pledged $275 billion to a program that includes cutting mortgage payments for as many as 9 million struggling homeowners and expanding the role of Fannie Mae and Freddie Mac in curbing foreclosures.

The plan will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, the president said. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, he said.

The Obama plan will use $75 billion, mostly from the $700 billion financial bailout fund, to match reductions lenders make in interest payments that lower borrowers’ payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent.

Companies that service mortgages will get $1,000 for each modified loan, and as much as $1,000 for three years when the borrower stays current, the government said. Homeowners also are eligible for $1,000 annually for five years for remaining current on their loans, according to the plan. The cash will be applied to reducing the principal balance of the loan, according to a White House fact sheet.

The policy addresses the foreclosure problem directly by offering lenders incentives to refinance some mortgages at a better rate. As a financially responsible person who bought within her means, I feel a little peeved that slammed speculators are getting the better deal. But the point of the bill isn’t to please responsible people. It’s to keep people in their homes and prop up a system that rewards risk.

The ideal outcome in this consumer spending-driven economy is that people are bouyed into amping up their consumption again. In that sense, our economic system does not want people to live within their means, because nobody will grease its wheels.

Obama is running a massive experiment. He is essentially nationalizing functions formerly left mostly to the market–job creation, housing prices, banks–on the premise that the economy will eventually return to a credit-rich, consumer-driven mode. The biggest danger here is that people become overly reliant on government, while government becomes intoxicated with power. Central planning will happen if the plan gets enough inertia. The key is to monitor the program carefully and feed the market once sectors begin looking healthy again (or have bubble potential).

It’s too early to call an outcome. This is hell for cynics, and hope for optimists.

I hope it works.

Written by Drea Knufken

Drea Knufken

Currently, I create and execute content- and PR strategies for clients, including thought leadership and messaging. I also ghostwrite and produce press releases, white papers, case studies and other collateral.