Obama Administration to Reduce Mortgage Rates to Address Foreclosure

by on Foreclosure Rates

The administration of President Barack Obama is considering using taxpayers’ money to lower monthly mortgage payments of homeowners who are in danger of losing their homes to foreclosures.

The effort to help distressed homeowners avoid foreclosure is part of the $50 billion housing plan aimed at reducing the number of foreclosed homes and creating national standards for home loan modification.

The Obama Administration has several options to abate foreclosures. It could adopt Federal Deposit Insurance Corp. Chairman Sheila Bair’s proposal for the government to subsidize losses should homeowners fail to meet their payments again. This proposal is aimed at encouraging banks to lower payments of borrowers.

Or, the Obama Administration could use the allocated funds to modify loans. This involves the government subsidizing a further drop of interest rate if lenders agreed to lower a loan borrower’s rate.

The biggest challenge posed by these foreclosure prevention options is how to choose homeowners who will qualify as the number of abandoned and vacant properties in the country rises to over 274,000.

The Obama Administration is also expected to support a proposal in Congress to allow bankruptcy judges to change the terms of home loans.

However, the mortgage industry is opposing the proposal, arguing that it permits lenders to charge reduce rates.

On the other hand, lawmakers are preparing to impose as much as $8,000 tax reduction for first-time property buyers to boost the housing market. The tax credit proposal is included in the stimulus bill which also contains foreclosure prevention measures.

The tax credit measure covers only first-time homebuyers who will buy properties at the start of 2009 until November.

The tax credit measure is aimed to reduce foreclosures by providing a 10-percent credit based on the total market value of a property, or a maximum of $8,000. It will cover couples who are earning $150,000 and below and single people who are earning not above $75,000.Under the tax credit measure, homebuyers are required to repay the tax credit if they decide to sell their properties within three years from the time they acquired it. The measure is expected to cost the U.S. government nearly $6.6. billion.

Moody’s Economy.com chief economist Mark Zandi pointed out that the tax reduction measure could help prevent foreclosures if the U.S. government can convince lenders to ease credit standards and purchase more mortgage-backed securities in order to reduce mortgage rates.

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