President Barack Obama unveiled the administration’s Homeowner Affordability and Stability Plan in Phoenix, Arizona, on Wednesday. The multi-pronged plan now includes $75 billion in government funding, rather than the original $50 billion price tag suggested by officials earlier this week, and will subsidize rates and help protect servicers against falling home prices. White House officials say the new program will help as many as 7 to 9 million homeowners restructure or refinance their mortgages to avoid foreclosure.
The president described three primary components designed to stem the spiraling housing crisis: – Refinancing for up to 4 to 5 million “responsible homeowners” – $75 billion for loan modifications aimed at 3 to 4 million at-risk homeowners – Low mortgage rates through GSEs, Fannie Mae and Freddie Mac
Affordable Mortgage Refinancing
Step one of the plan – providing access to low-cost refinancing for “good faith” homeowners suffering from falling home prices. Mortgage rates are currently at historically low levels, presenting homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, Obama explained, millions of responsible homeowners who have made their mortgage payments on time – through no fault of their own – have seen the worth of their homes drop low enough that they now owe more than 80 percent of the property’s value, making them unable to access these lower rates.
As a result, the administration is instituting a new program that will help as many as 4 to 5 million homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through the GSEs. For many families, Obama said, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year.
$75 Billion Homeowner Stability Initiative
Secondly, the administration plans to implement a $75 billion Homeowner Stability Initiative with loan modifications for 3 to 4 million struggling homeowners. Obama pointed out that millions of families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income, particularly those who received subprime and exotic loans with exploding terms and hidden fees.
The Homeowner Stability Initiative has a simple goal, Obama said — reduce the amount homeowners owe per month to sustainable levels, using money allocated under the Financial Stability Plan and the full strength of Fannie Mae and Freddie Mac. The plan is to bring payments down to no more than 31 percent of a borrower’s income, as well as help stabilize neighborhood home prices by preserving $6,000 in property values that would be lost with ensuing foreclosures.
The initiative will apply solely to homeowners who commit to make reasonable monthly payments to stay in their home – it will not aid speculators or house flippers. Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default even though their payments are current, as well as those borrowers already past due on their mortgages.
The foundation of this initiative is a shared effort between lenders and the federal government to reduce monthly payments with modifications. Lenders will be responsible for bringing down interest rates so that a borrower’s monthly mortgage payment is no more than 38 percent of income. Then, the government will match further reductions in interest payments, dollar-for-dollar with the lender, to bring that ratio down to 31 percent.

That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.
Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. In addition, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind. Servicers will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.
To provide an extra incentive for borrowers to keep paying on time, the government will provide a monthly balance reduction payment that goes straight toward reducing the principal balance of the mortgage loan. As long as a borrower stays current on the loan, they can earn up to $1,000 in principal reductions each year for five years.
To encourage lenders to modify more mortgages and enable more families to keep their homes, the administration, together with the Federal Deposit Insurance Corporation (FDIC), has developed a partial guarantee initiative. An insurance fund of $10 billion will be created by the Treasury Department to discourage lenders from opting to foreclose on mortgages out of fear that home prices will fall further. Holders of mortgages modified under the program will be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.
The Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s IndyMac program. All financial institutions receiving government funding will be required to implement loan modification plans consistent with Treasury Guidance, and Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee. The administration plans to work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market.
Lower Mortgage Rates Through GSE Support
Using funds already authorized in 2008 by Congress, the Treasury Department is increasing its capital commitment to Fannie Mae and Freddie Mac. According to the administration, the increased funding will enable Fannie Mae and Freddie Mac to carry out “ambitious efforts” to ensure mortgage affordability and provide “forward-looking confidence” in the mortgage market.
The Treasury is injecting another $100 billion into each of the mortgage financiers, and will allow them to buy up more mortgages by increasing the size of the GSEs’ retained mortgage portfolios by $50 billion. The Treasury will also continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities (MBS).
In a prepared statement issued to the press, the administration said that the deep contraction in the economy and in the housing market has created devastating consequences for homeowners and communities throughout the country.
Millions of responsible families who make their monthly payments and fulfill their obligations have seen their property values fall, and are now unable to refinance at lower mortgage rates, the statement said. In addition, millions of workers have lost their jobs or had their hours cut back and are now struggling to stay current on their mortgage payments, and now, neighborhoods are struggling as foreclosures weigh down nearby property values, officials said.
Statistically speaking, President Obama said there are nearly 6 million American households facing possible foreclosure, and each foreclosed home reduces surrounding home values by as much as nine percent.
The Homeowner Affordability and Stability Plan is part of the President’s broad, comprehensive strategy to get the economy back on track as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs. The plan will not only help responsible homeowners on the verge of defaulting, but will prevent neighborhoods and communities from being pulled over the edge too, President Obama said.