Interest Rate Roundup

Wednesday, February 18, 2009

More on the Obama foreclosure plan

Today is the big day that the Obama administration releases its mortgage foreclosure prevention plan. Based on the various advance news reports out there, here are some details on how this program will work (along with where the details came from):

* The government will provide incentive payments to mortgage servicers in an attempt to encourage them to modify more loans, and to offset losses suffered by mortgage investors and lenders who own the loans being modified. The total amount to be dedicated to the effort is estimated at $50 billion, with the money coming from leftover TARP funds. The subsidy would reportedly amount to $800 to $1,000 per loan (Wall Street Journal).

* Loan modifications would typically involve an interest rate reduction or an extension of the loan's term. Servicers may be protected against lawsuits from investors; fear of being sued has prevented many servicers from aggressively modifying loans (WSJ).

* There will be some method established to allow upside down borrowers to refinance their mortgages. Currently, borrowers can't refinance if they owe more than their homes are worth. Fannie Mae and Freddie Mac would assist with this process, which would be open only to those still current on their payments. But it isn't clear how (WSJ).

* The idea is to reduce a borrower's mortgage payments to 31% of gross (pre-tax) income (Bloomberg, NY Times)

* Borrowers do not need to be delinquent already to qualify for a modification (Bloomberg).

* The plan is voluntary for lenders and investors, not mandatory (Bloomberg).

* The administration will back legislation in Congress to allow bankruptcy judges to cram down principal on home mortgages. It also wants authority for FHA and VA loans to be modified, something not currently allowed (Bloomberg). But the plan does not appear to include a method for explicit principal balance reduction, relying instead on the implicit threat of a court cramdown to prod servicers into action (WSJ).

* Borrowers would eventually be required to make up the difference between what they currently pay and what they are allowed to pay in a modification. This difference would be covered by any presumed rise in house prices between now and the time they refinance the loan or sell the house (WSJ).

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