Obama mortgage aid targets distressed homeowners

President Obama is approaching America’s burgeoning foreclosure problem with a bag full of new taxpayer-financed incentives to entice lenders to make millions of mortgages more affordable for distressed homeowners.

In a much-awaited announcement, the White House said Wednesday it will use $75 billion already authorized by Congress to essentially subsidize the mortgage payments of millions of Americans whose homes are now worth less than they owe. Much of the money will go to banks to reward them for amending mortgages to make them more affordable, but homeowners will also get a financial bonus for staying current with their mortgage payments.

Money would also be used – beyond the $75 billion – to bulk up Fannie Mae and Freddie Mac, the government-owned buyers of mortgages. This would allow them to acquire more loans.

“This is not a silver bullet, although I don’t think one exists,” says Mark Zandi, chief economist at Moody’s Economy.com. “This should be helpful to stem but not stop the continuing rise in foreclosures.”

Is the plan big enough?

While the White House plan involves billions of dollars, the size of the problem is even larger. Some $500 billion in mortgages, Mr. Zandi estimates, are underwater – meaning the value of the mortgage is higher than the value of the house.

“There is no way to help all $500 billion,” he says.

In 2008, there were 3.2 million foreclosure filings, estimates RealtyTrac, which tracks and sells foreclosure data. That’s an 81 percent increase over 2007.

“Depending on who you listen to, there could be 10 million to 13 million more foreclosures in the next five to six years,” says John Taylor, president of the National Community Reinvestment Coalition, which represents some 600 community groups in Washington. “That is pretty catastrophic.”

Target: responsible homeowners

The White House initiative, called the Homeowner Affordability and Stability Plan, is aimed at homeowners who are still making their monthly payments but cannot refinance because the value of their home has fallen so much. Because many homeowners have been unable to refinance their homes, their mortgage payments, particularly as a percentage of their income, have climbed as their adjustable-rate mortgages have reset.

Such a trend has been particularly challenging as the recession has deepened and layoffs have mounted.

“In the past, if you found yourself in a situation like this, you could have sold your home and bought a smaller one with more affordable payments. Or you could have refinanced your home at a lower rate,” said Mr. Obama Wednesday in Mesa, Ariz. “But today, home values have fallen so sharply that even if you make a large down payment, the current value of your mortgage may still be higher than the current value of your house. So no bank will return your calls, and no sale will return your investment. You can't afford to leave and you can't afford to stay.”

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