2009 Homeowner Affordability and Stability Plan

Why Do We Need A Mortgage Restructuring Initiative?

More than 1% of all U.S. homes were in some phase of the foreclosure process in 2007, twice the number as 2006. In 2008, foreclosure filings doubled, to 3.1 million; 25% of those properties were foreclosed. Not only is this bad for the homeowners and their communities, it's also bad for the banks: foreclosure proceedings can cost as much as 50 percent of a property's value.

One possible trigger: a jump in mortgage payments resulting from a substantial increase in the adjustable interest rate on sub-prime mortgages. The adjustments kicked in during calendar 2007 and 2008. In 2004, Fed chief Alan Greenspan had "argued that more Americans would benefit from taking out adjustable-rate mortgages." Not a clear crystal ball.

How Does This Mortgage Restructuring Plan Work?

Homeowners may wish to refinance their homes when interest rates drop if they plan to stay in their homes for a significant period of time; the immediate result is a reduced monthly mortgage payment. Today's mortgage rates are at historic lows; but under current banking rules most families who owe more than 80 percent of the value of their homes have a hard time securing refinancing. And because property values have dropped significantly, millions find themselves unable to refinance. The Obama plan is targeting 7-9 million "responsible" homeowners who might default if they were unable to refinance.

See Federal Government Doubles Fannie Mae, Freddie Mac Infusion

What Was The Dodd Plan?

In April 2007, Sen. Christopher Dodd (D-CT) (Senate Banking, Housing and Urban Affairs Committee chair) convened a Homeownership Preservation Summit. He was worried about defaults on "too good to be true" sub-prime mortgages and wanted banks to modify loans with very low "teaser" rates. After the summit, Dodd's office released a statement of principles, but nothing came of them. He shifted his attention to his ill-fated run for the presidency. Today, Dodd is in-house counsel at Bank of America, which acquired Countrywide last year.

What Did President Bush Do?

In December 2007, Bush called for a freeze on teaser rates "offered to entice new borrowers to take out sub-prime mortgages." This voluntary program reportedly would have helped about a million people who could pay their mortgages at the introductory rate but not after a jump. How it might have worked: lenders would "freeze the interest rates and monthly payments for five years for subprime borrowers who fit a limited set of conditions." Nothing came of it.

Late in his Presidency, Bush tried the voluntary route one more time. Treasury Secretary Paulson announced the Hope Now Alliance in October 2008; lenders promised to help prevent mortgage defaults. Once again, voluntary plans produced nothing but hot air.

What Did The 2008 Democratic Presidential Candidates Say?

In January 2008, presidential candidate Sen. Hillary Clinton (D-NY) called for freezing interest rates for five years and for a 90-day moratorium on foreclosures.

Former Sen. John Edwards (D-NC) called for a seven-year freeze. Then-Sen. Barack Obama (D-IL) called for better lender disclosure.

All three candidates supported "a government fund to help borrowers transition from unaffordable adjustable mortgages to lower-rate fixed ones."

What Did Congress Do In 2008?

In July 2008, Congress passed HOPE for Homeowners, inspired by FDR's Home Owners’ Loan Corporation. HOPE for Homeowners, which started 1 October 2008, helps refinance a mortgage into a 30-year or 40-year fixed-rate loan with lower payments. This Federal Housing Administration (FHA) program targets responsible owner-occupants with mortgage debt-to-income of at least 31 percent; the applicant is the lender.

Yet after five months, Hope for Homeowners had closed only 25 loans, not the hundreds of thousands. One possible reason: homeowners had to share "between 50 and 100 percent of appreciated equity built up in the home for the first five years." Another reason: securitization of those mortgages muddles refinancing. Period.

What Did FDR Do?

(1) By the mid-1930s, the Home Owners Loan Corp. had financed nearly 20% of the homes in the U.S.; it was authorized under the Home Owners Refinancing Act.
(2) The Emergency Farm Mortgage Act authorized $2 billion in tax-exempt bonds to help farmers.
(3) Next came the Farm Credit Administration. Within 18 months, FCA had refinanced 20% of the nation's farm mortgages.
Source: Anxious Decades: America in Prosperity and Depression, 1920-1941, pp 295-296

Why Is The Obama Mortgage Restructuring Initiative Controversial?

One reason the plan is controversial is because for many borrowers, refinancing doesn't work. In December, federal banking regulators reported that "53% of consumers receiving mortgage modifications were again delinquent after six months.

Another controversy relates to the power wielded by the Office of the President: government-initiated, mandatory changes in private lending practices makes some people nervous. Then there is the abysmal track record of HOPE for Homeowners.

On the other hand, there is pressure for Obama and the government to do something - anything - that might help the economy recover more quickly.