Today, the Obama administration unveiled its plan to address the housing crisis. The Homeowner Affordability and Stability Plan aims to “help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure,” thus halting the ever-increasing number of foreclosed upon properties dragging down home values for entire neighborhoods. It consists of two separate programs:
One program is aimed at 4 million to 5 million homeowners struggling with loans owned or guaranteed by Fannie Mae or Freddie Mac to help them refinance their mortgages through the two institutions.
A separate program would potentially help 3 million to 4 million homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.
This plan’s mere existence is refreshing, as the Bush administration over and over avoided addressing the housing crisis with anything stronger than a purely voluntary program for lenders, without incentives or requirements. Under Bush’s major housing initiative, Hope Now, “lenders remain difficult to contact and often only agree to loan modifications that are unaffordable for the borrowers, who quickly end up delinquent again.”
Departing from the Bush model, the Obama administration plans to actively fund mortgage modifications, bringing down mortgage payments to 31 percent of income; servicers will receive “$1,000 for each successful modification, as well as additional government funding for each month the borrower stays current on its loan.” Also, somewhat buried in the plan is a provision stating that any financial institution receiving TARP money “will be required to implement loan modification plans.” These requirements and incentives should pull lenders in.
While most of the plan can be implemented using the authorities under TARP II and by allowing Fannie Mae and Freddie Mac to shoulder a lot of the refinancing burden, there is one facet that needs Congressional approval: changing a bankruptcy law to allow judges to “cram-down” mortgage payments for troubled homeowners. To this end, Lee Fang over at ThinkProgress asks an important question of conservatives who criticized the lack of housing provisions in the economic stimulus package: “Were Republicans using the housing provisions as a cudgel to simply stall and defeat the recovery package? Or are they genuinely interested in solving the problems with the housing market?”
Indeed, conservatives now have an opportunity to help advance a comprehensive solution to the very problem they claimed was being ignored. But will they balk at adding the final piece to the puzzle, for fear of bankers’ wrath? Stay tuned.