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Obama plan to lower mortgage payments could help, but how much?

President Obama unveiled his plan to cut mortgage payments for 'responsible homeowners' in trouble. But the housing crisis is so massive that no one program can solve it, experts say.

By Staff writer / February 1, 2012

President Obama holds up a proposed mortgage application form as he speaks at the James Lee Community Center in Falls Church, Va., Wednesday.

Cliff Owen/AP

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President Obama fleshed out a new mortgage-relief plan Wednesday, saying the steps he outlines would "help millions of responsible homeowners" and the US economy.

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The proposal aims to bring lower monthly mortgage payments to as many borrowers as possible.

A key element: Where past refinancing initiatives have focused especially on Americans with so-called "conforming" loans backed by Fannie Mae or Freddie Mac, Mr. Obama is hoping to extend similar relief to loans underwritten by private lenders.

Millions of households hold these loans, and a refinance at today's low interest rates can bring savings of $300 per month for typical families. More than one-third of them have balances larger than the home's current value, which has made traditional refinancing impossible.

With the housing market still depressed, and overall consumer spirits still dampened by America's debt overhang, many economists support the pursuit of new policies to help reduce foreclosures and stabilize home values.

"It would make a difference" for the housing market and economy, says Patrick Newport, an economist at IHS Global Insight, referring to Obama's latest initiative.

But he warns against thinking that the impact of Obama's or other proposals would be enormous. Yes, the housing market and mortgage debts are central to the nation's current struggles, says Mr. Newport, who specializes in housing. But no single policy is a quick or dramatic fix.

The president, in essence, acknowledged that point in a speech Wednesday in Falls Church, Va.

"The truth is, it’s going to take more time than any of us would like for the housing market to fully recover from this crisis," Obama said as he unveiled details of new initiatives. "I’ll be honest – the programs that we put forward [so far] haven’t worked at the scale that we hoped."

He said his administration's efforts have helped nearly 1 million people refinance in the past two years. But the scale of the problem is massive.
 
The nation now has about 30 million mortgages backed by government-sponsored enterprises (GSEs), mainly Fannie or Freddie, Newport says. About 3 million of those are "under water," meaning the loan is now bigger than home value. Another 20 million or more have been underwritten entirely by private lenders. Some 35 percent of those, 7 million or more, are under water.

Obama's argument is that as more families refinance at a low interest rate, incidences of default and foreclosure will diminish, helping to stabilize home values and restore consumer confidence. The families who benefit will also get extra cash in their pockets each month, which they can use to buy other things in the economy or to pay down debt.

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