President Barack Obama speaks about relief for Americans facing home foreclosure at Dobson High School in Mesa, Arizona February 18, 2009.
“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,” he said.
However, the plan will only help those who played by the rules, he stressed, adding that it won’t help speculators who took risky bets on the market or dishonest lenders who acted irresponsibly.
According to the president, the plan will make it possible for an estimated four to five million currently ineligible homeowners who receive their mortgages through Fannie Mae or Freddie Mac to refinance their mortgages at lower rates.
This is designed to help millions of families are “underwater,” which means they owe more on their mortgages than their homes are worth. These families are unable to sell their homes, and unable to refinance them. So in the event of a job loss or another emergency, their options are limited.
At the same time, the plan will create new incentives so that lenders work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure.
Sub-prime loans — loans with high rates and complex terms that often conceal their costs — make up only 12 percent of all mortgages, but account for roughly half of all foreclosures.
In addition, the plan will take major steps to keep mortgage rates low for millions of middle-class families looking to secure new mortgages.
Most new home loans are now backed by Fannie Mae and Freddie Mac, which guarantee loans and set standards to keep mortgage rates low and to keep mortgage financing available and predictable for middle-class families.
“Therefore, using the funds already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities so that there is stability and liquidity in the marketplace,” Obama said.
The Treasury Department announced earlier Wednesday it was doubling its financial support to the two mortgage finance giants to 200 billion dollars each in an effort to stabilize the real estate sector.
Meanwhile, the government will pursue a wide range of reforms designed to help families stay in their homes and avoid foreclosure, Obama said.
He said that 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.
“That’s the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure,” the president said.
Obama released the plan at a time when foreclosures are soaring. In 2008, more than 2.3 million homeowners faced foreclosure proceedings, representing an 81 percent surge from 2007.
A total of 8.1 million U.S. homes, or 16 percent of all households with mortgages, could fall into foreclosure by 2012, according to a report by Credit Suisse.
“The effects of this crisis have also reverberated across the financial markets. When the housing market collapsed, so did the availability of credit on which our economy depends,” said Obama.
“As that credit has dried up, it has been harder for families to find affordable loans to purchase a car or pay tuition and harder for businesses to secure the capital they need to expand and create jobs,” he said.
Obama’s strategy for economic recovery is a stool with several legs, as he’s said, and one of them is solving the foreclosure crisis.
The administration is also working to stabilize, repair and reform the nation’s financial system in order to get credit flowing again to families and businesses. A new financial rescue plan was released earlier this month.
Just one day before the mortgage relief plan, Obama signed a 787-billion-dollar economic stimulus bill into law in Denver, Colorado. It is designed to jolt the ailing U.S. economy by providing government spending and tax cuts for both individuals and businesses.