The president’s foreclosure prevention program won’t save everyone — and it shouldn’t try — but it is a practical and reasonable plan to take on a root cause of the economic crisis.
Keeping as many as 9 million at-risk borrowers in their homes will attack the complex and vicious cycle that has led to the worst recession in decades. It is a necessary part of a multi-prong effort the Obama administration has launched in its first few weeks to soften the arc of economic deterioration.
The $75 billion foreclosure plan has two major components. The first would allow mortgage refinancing for 4 million to 5 million homeowners who are “underwater,” meaning dropping values have left them with little or no equity in their homes.
The second part of the plan is meant to encourage loan modifications for homeowners who have seen income decreases due to job losses or who have an adjustable rate mortgage they can’t refinance.
The plan aims to lower owners’ payments to no more than 31 percent of their income, with government making up part of the gap.
In addition, the Treasury Department said Wednesday it will commit $200 billion in new backing for mortgage giants Fannie Mae and Freddie Mac, which will play a key role in the plan.
The major criticism leveled against the foreclosure program is that it does nothing for the 90 percent of Americans who are cutting back their personal budgets in order to make their mortgage payments.
And that is, to a certain extent, true. If you aren’t in trouble, you cannot use this plan to get better mortgage terms. And neither will you get additional food stamp benefits, extended unemployment and access to health care paid for by Medicaid.
But one or all of those programs could keep your neighbors in their house, stabilize home values in your area, prevent banks from taking further losses on bad mortgages and maybe — just maybe — prompt banks to begin lending again.
If businesses can get credit, they can hire people and begin to slow or reverse job losses.
There’s a lot to like about the plan. First, President Obama did not make the mistake committed last week by Treasury Secretary Tim Geithner in rolling out the bank stabilization plan. Where Geithner was vague in how bad bank assets would be removed from bank balance sheets, Obama offered a detailed and targeted mortgage plan.
To be sure, it helps that ordinary folks are quite a bit more familiar with a home mortgage than they are the details of bank business plans.
Furthermore, we liked that Obama’s Homeowner Affordability and Stability Plan is voluntary, though it is spiked with incentives to encourage lenders to modify loans.
Slowing the rising tide of foreclosures and the precipitous drop in home values is the linchpin to turning the economy around. This could build a floor under the plummeting housing market. Let’s hope it holds.
