The Obama Administration rolled out its much awaited foreclosure-prevention plan they will use the second half of the TARP funds for on Wednesday, saying it could help as many as 7 million to 9 million homeowners meet their mortgage payments. Some of the Key components include modifying the terms of delinquent loans, refinancing underwater mortgages and putting more money into the federal housing agencies in order to keep mortgage rates low. But will it work?
The fact of the matter is that while the housing market may have started the devastating decline of our economy, we now have a record number of people out of work, and even more on the horizon. However, this plan may be a good start as it is a series of targeted interventions designed to help specific groups of borrowers and by doing that, it’s hoped, limit the damage caused by foreclosures both to neighborhoods and to the overall economy.
The idea in this new plan is to use TARP funds to restructure the loans of homeowners who are behind on their mortgages or, and here is where the plan may do some real good, those who are an imminent danger of falling behind. The Obama Administration is keenly aware that up until now, only homeowners that were already behind on their payments qualified for government assistance, which only made the problem bigger. Now, those of you that have been struggling to keep up and have somehow managed to scrape by have a chance of reducing your mortgage as well. Up to now, homeowners had to wait to default before they could even get a return phone call from their bank. However, some people are saying that this new plan won’t do a lot of good because it gives much of the power to make the decision on who gets help and who doesn’t to the lenders.
The Obama Administration accounted for this though and added incentives to lenders that cut the interest rate on loans to help reduce homeowners’ monthly payments. The plan is to pay lenders $1,000 every time they do this, but they have to reduce the borrowers’ payment down to 38% of their gross income, which is quit a bit. But the $1,000 will be paid out for three and five years for keeping the loan current. This doesn’t sound like much of an incentive, but given the economic pressure banks and lenders are under, every little bit helps.
Another criticism of this plan for the second half of the TARP funds is the fact that the Obama Administration didn’t make it mandatory for lenders to make these deals, and with the lack of help many homeowners are getting, the fear is banks won’t spend a lot of their time on these restructured mortgages. But given the fact that policymakers had to walk a fine line between helping borrowers who have been caught off guard by tricky mortgage products and falling house prices and those who simply made imprudent decisions and genuinely can’t afford their homes, it is at least a step in the right direction. In order to avoid propping up the second group, Treasury won’t subsidize loan modifications that reduce the interest rate below 2%. If you can’t afford a 2% mortgage, in the eyes of the government, you can’t afford your house. The plan also doesn’t apply to investors or people with jumbo mortgages — those, historically, larger than $417,000. Loans for homes that would be more valuable to lenders if repossessed won’t get modified.
As to how much the Obama Administration’s new plan will help, that remains to be seen. However, we all know how dismal the results were for the first half of the TARP funds, so we should at least be better off than we are now. Mortgage lenders will have to really get on the ball in order for it to work, because deciding who gets the reduced interest is in their hands. How about you homeowners? Do you think this plan will help you out? How about the lenders out there; do you think it’s too much pressure on you? I really want to know what the rest of you think about this plan, and if you believe there was any better alternative. Please leave your comments, questions and suggestions, and let’s keep the conversation going.