Fannie Mae and Freddie Mac are the largest source of housing financing in the United States; although they are private entities, Congress authorized their creation and established their public purposes. In September, the federal government pledged up to $200 billion to cover the losses associated with the sub-prime mortgage crisis.
First, through a rules change, President Obama proposes that as many as 5 million "responsible" homeowners with conforming 30-year loans be allowed to refinance their Fannie Mae or Freddie Mac mortgages, even if they owe more than 80 percent of the value of their home. The rules change is needed because decreased property values mean that homeowners cannot meet the required 80 percent loan-to-value ratio.
Second, another 3 million to 4 million homeowners who are current on mortgage payments but in "imminent" risk of default may be able to avoid foreclosure by modifying their mortgages through a new, $75 billion, Homeowner Stability Initiative. This Initiative includes homeowners who are "underwater" -- their outstanding loan balance is greater than their property value
Reuters reports the source of the $275 billion:
The plan would use $50 billion from the $700 billion financial bailout fund approved last year, up to $200 billion authorized by last year's housing bill and up to $25 billion from housing finance firms Fannie Mae and Freddie Mac.
The Guardian reports that "[a]n estimated 400,000 homeowners across the US lost their houses last year, unable to keep up payments, and one in six of those still owning their own homes are in negative equity."
Although this is the most painful economic downturn since the 1980s, it is not, as President Obama asserts ""a crisis unlike any we've ever known." The components of this economic downturn -- poorly managed banks, reduced property values, (much greater than now) unemployment -- were all present during both the 1980s recession (which also had double-digit interest rates) and the Great Depression.
Critics of this -- and other bank rescue efforts -- often cite moral hazard as their rationale: "reward[ing] those who made all the wrong decisions." And OpenMarket cites redefault rates as a reason for opposing efforts such as those announced by the Obama Administration today. And then the big question to Obama: "Does your plan compensate banks for bad mortgages they should have never made in the first place?"
Watch this CNBC interview with Scott Mintz, a Los Angeles chiropractor who is underwater on four houses he bought to fix-up and re-sell.
What do you think? Should we be trying to keep people in their homes at all costs? Should we be protecting speculators from their decisions?