Federal Foreclosure Prevention Plan Summary

Yesterday, President Obama announced a extensive foreclosure prevention plan. The plan is in addition to the $787 billion economic stimulus bill Obama signed on Tuesday, the Financial Stability Plan the Treasury department announced last week, the mortgage bankruptcy “cram-down” bill currently being discussed, and any other regulatory restructuring that is being contemplated by Congress and the Obama administration.

Homeowner Stability Initiative:
The plan calls for a $75 billion partnership between government and lenders to share the costs of modifying certain at-risk loans. Banks would reduce a borrower’s loan amount to 38% of their monthly income. The government would match additional reductions until the monthly payments equal 31% of monthly income.

Lenders participating would receive incentives for completing modification. Borrowers that are able to stay current would receive balance deductions within the first five years are included in the plan.

Partial Guarantee Program through FDIC:
The plan calls for $10 billion to be spent to provide up to 50% guarantee on loans that received an approved modification, depreciated in value and saw the borrower default. The goal is to discourage lenders from foreclosing quickly on loans that are at risk of depreciating further.

Government Sponsored Enterprise-based refinancing:
Currently Fannie and Freddie can’t refinance any loans that have less that 20% equity. The government will loosen the refinancing requirements of GSEs allowing them to refinance loans that they either hold or guarantee, as long as the balance does not exceed 105% of the current home value. The administration projects this will help three to four million borrowers. GSE's would receive an additional $100 billion over the September 2008 figure to complete this refinancing plan.

Increase in GSE portfolio:
Treasury also will permit Freddie and Fannie to increase the size of their portfolios by $50 billion from to $900 billion.

Only property used as a primary residence would be eligible for assistance. Obama’s proposal relies heavily on bank participation and some skepticism exists whether borrowers who are out of work and behind on payments can be saved. There is also skepticism as to why someone who is upside down on value with no equity and a past due mortgage would want to work out versus simply giving it back to the bank and walking away.

Additional specifics and technical details are expected to be announced on March 4th and it will be interesting to see whether this plan will work or if it is simply throwing good money after bad.