President Obama intends his $275 billion homeowner rescue plan to be a lifeline to millions of families struggling to keep their homes and a stabilizing influence on the housing market. The president's bold move injects resources where they are desperately needed — but it may not be bold enough.
In places like Tampa Bay where housing values have plunged as much as 42 percent in the last two years, the plan leaves out homeowners who owe significantly more than their homes are worth. Still, Obama's Homeowner Affordability and Stability plan is a big step beyond what the Bush administration did for troubled homeowners, which was essentially nothing. It recognizes that homeowners are facing different types of difficulties and offers multiple strategies.
For those in immediate danger of losing their homes, Troubled Asset Relief Program money will be used to provide incentives to lenders and loan servicers to modify loans. Mortgages would be adjusted — primarily through reducing interest rates or extending the length of loans — so households would not pay more than 38 percent of gross monthly income. Then the government would subsidize a further reduction, to 31 percent of gross monthly income for five years.
Though it would still be up to lenders whether to participate, the carrots in the plan are pretty strong, and many would come out ahead by avoiding costly foreclosure. The administration hopes that this will keep 4 million households from being forced from their homes.
Another component would help homeowners who are able to make their monthly payments but can't refinance because they no longer have a 20 percent equity stake in the house. Their homes have lost too much value in the downturn. The plan offers homeowners with mortgages owned or guaranteed by Fannie Mae or Freddie Mac the ability to refinance at a lower interest rate as long as the mortgage is for no more than 105 percent of the property's current value.
That 105 percent threshold should be higher, considering how many communities have seen housing values sink so fast. Many homeowners' mortgages are more than 5 percent higher than their homes' values. While the government says it expects as many as 5 million homeowners will take advantage of this refinancing, other economists estimate that it will help only about a million households. There are many more homeowners throughout Florida and the country who are in danger of losing their homes through no fault of their own — and they need help in lowering their payments with more favorable mortgages.
Obama's plan does not need congressional action except for a key change to bankruptcy law that would allow bankruptcy court judges to modify primary residence mortgages. Republican leaders in Congress have fiercely opposed this change, as did President Bush. But it is absolutely essential. Bankruptcy judges already can modify every other kind of secured loan except residential mortgages. Once the rules are changed, lenders will be far more motivated to negotiate reasonable mortgage modifications with struggling homeowners, knowing that otherwise a judge may allow even steeper adjustments.
If property values continue to fall and job losses accelerate defaults, more help will be needed. Obama's plan is targeted at keeping people in their homes and stabilizing neighborhoods, and that's exactly where the attention should lie. But for too many Floridians, this will be too little, too late.