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Obama's Ambitious Housing Plan

By Dan Froomkin
1:28 PM ET, 02/18/2009

President Obama today unveiled the third leg of his economic recovery stool -- and it was a bit more substantial than had been anticipated. His plan could cut mortgage payments for as many as nine million homeowners.

Alison Vekshin writes for Bloomberg: "The Obama plan will use $75 billion from the $700 billion financial bailout fund to match reductions lenders make in interest payments that lower borrowers’ payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent....

"The plan also will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie [Mae] and Freddie [Mac], according to a White House fact sheet. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, the announcement said."

Michael A. Fletcher and Renae Merle write for The Washington Post: "Finance companies cannot currently refinance a loan if the homeowner owes more than 80 percent of the home's value. But under the plan, Fannie and Freddie -- which were taken over by the government last year -- would be able to refinance a mortgage if it does not exceed 105 percent of the current value of the property."

Here are Obama's prepared remarks. The White House also released an executive summary, a fact sheet, a FAQ and a sample worksheet.

From Obama's remarks: "The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments....

"Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure. And we are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too – as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs."

Obama also said his "administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan."

David Leonhardt wrote in this morning's New York Times that "there are two different groups of homeowners who are at risk of foreclosure.

"The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes.

"The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater. If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off."

Despite signs that Obama would focus primarily on the first group, the plan he announced this morning will address a good chunk of the second group as well.

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