President Barack Obama Uncovers U.S. Housing Plan
A Feb. 18, 2009 article from Reuters reveals President Barack Obama’s plan to solve America’s housing crisis as a part of his serious initiative to revive the nation’s economy. The President pledged up to $275 billion as assistance to at least nine million American families. These families will be given the chance to restructure or refinance their mortgages to avert foreclosures.
The home mortgage crisis is a major factor in the economic meltdown. Numerous American homeowners are burdened with home mortgages they are unable to pay, subjecting their homes to foreclosure. In fact, according to the Mortgage Bankers Association, just over 9% of all home loans in the United States were in arrears or in foreclosure at the end of 2008. Moreover, Credit Suisse reported that 16% of all households with mortgages could end up facing foreclosure by 2012 – that is equivalent to a total of 8.1 million homes in the United States.
In a speech addressed to an attentive audience in Mesa, Arizona, President Barack Obama articulated the interconnection of the housing crisis, the financial crisis, and the even broader economic crisis.
Another article, this one from The New York Times, revealed that the housing plan comprises three parts. The first component seeks to aid homeowners who are up-to-date on their payments but are paying high interest rates and have no way of refinancing due to insufficient equity in their homes.
The second part would provide incentives to lenders who would change the loan terms to make them affordable for the straining borrowers, thus helping around four million people who are at risk of foreclosure. To make this possible, a $75 billion program will be created to subsidize loan modifications that allow a reduction of the household’s monthly payment to as low as 31% of the family’s gross monthly income.
The last part would consist of $200 billion worth of additional financial backing to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Fannie Mae was created to buy mortgages from approved mortgage sellers, securitize them, and sell the resulting mortgage-backed security to investors in the secondary mortgage market with a guarantee that principal and interest payments are appropriately passed over to the investor. Freddie Mac was established to expand the secondary market for mortgages in the United States. Freddie Mac purchases mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. By buying mortgages, both GSEs provide banking and other institutions ensure that funds are constantly available so buyers can make new loans.
With this plan, as much as five million homeowners who are still making payments but cannot qualify for conventional refinancing will be able to refinance through Fannie Mae and Freddie Mac.
Related Sources:
The Wall Street Journal features an article on the housing bailout plan.
An article from MSNBC features a consumer’s guide to the president’s housing plan.
An article from Reuters features FDIC talking about Obama’s housing plan to have impact in March.