$75 Billion in Aid Heading Towards Homeowners

by Simon Lindsay on Foreclosure Crisis, Foreclosure Help

President Obama in Phoenix, AZ today unveiled his administration’s latest attempt to help save millions of Americans from possible foreclosure. The Homeowner Stability Initiative will provide up to $75 Billion dollars in aid to struggling homeowners; those who are facing foreclosure and those who also are “upside down” on their home loans. This new initiative is expected to help as many as 9 million homeowners and will be ready to start helping homeowners as soon as March 4, 2009.

Many economists have identified real estate as one of the driving factors behind the current economic crisis that has not only affected the United States, but almost every other industrialized country. Home prices have been in a free fall, with some areas experiencing close to a 50% drop in home prices over the past 2 years with no end in sight. Add to that a large number of adjustable rate mortgages that have come up for adjustment in interest rates and payments and you have a recipe for disaster. As a result many homeowners have found themselves owing more than their home is worth, or unable to make their housing payments because of the increase in payment, or because of the loss of income.

One of the highlights of the new plan being released on Wednesday is that the government would work with lenders to provide them with incentives to cut monthly mortgage payments. Under the proposal, no more than 31% of a borrower’s income could be used for housing payments. This part of the overall initiative is expected to help an estimated 5 million borrowers who may be facing immediate or near-term foreclosure.

Another 4 million homeowners are expected to benefit those who are paying for houses that are worth less than the mortgage, the so-called “under water” scenario. Under this program Fannie Mae and Freddie Mac, the quasi-government lending institutions that have had close to $200 billion pumped into to help absorb some of the losses, will work with homeowners to modify the loans to reflect the homes current value, the government will subsidize the loss resulting from the modification. The plan itself has provisions for up to a $6,000 buffer in the loss of value of a home.

Recognizing that housing was a key component to the current economic crisis, President Obama is also looking for it to be one of the factors that helps drive recovery. Under the new initiative the government will work to extend home loans available and affordable through a multitude of programs and means – including lowering interest rates, extending loans to more individuals, and working directly with lenders to help unfreeze some of the credit markets.

Whether this plan provides temporary relief or is a long-term solution remains to be seen. Supporters and critics of the plan both point out that this initiative can only do so much – and those who have bought more house than they can possibly afford may still not be able to keep their house even after modifications to original loan.

While this initiative may not help every struggling homeowner, supporters point out that one of the key features of the program is how encompassing it is. Instead of focusing on one type of homeowner it is throwing a wide net to help those in various situations. Even people who are not in immediate danger of losing their home may ultimately benefit under the plan by being able to negotiate lower interest rates or take advantage of the buffer against falling home prices.

Amid a deepening recession, and just one day following the signing of a massive stimulus package, many people see this program as a desperately needed lifetime to many borrowers who have faced difficulty getting their mortgages adjusted as banks and lenders froze most of their credit activities. It is hopes with government incentives and programs in place lenders will be willing to take on more risk and work with homeowners instead of pursuing more foreclosures, which has the ultimate affect of driving remaining home prices even further down.

Read the Full Plan Annouced By the President Obama