Obama's Foreclosure Plan

Yesterday The President outlined his new foreclosure prevention program. First lets take a look at the plan from the USA Today's article titled $75B anti-foreclosure plan is a "chance to rebuild," Obama says. Here is a snippet -

President Obama added the nation's housing foreclosure crisis to his economic recovery agenda Wednesday with a $75 billion plan to help up to 9 million troubled homeowners stay in their homes.

The program is tailored so up to 4 million homeowners can reduce their mortgage payment so it is no more than 31% of their income. As many as 5 million more facing foreclosure or who owe more on their mortgages than their homes are worth would have a chance to refinance, as long as their mortgage is not excessively higher than their home is worth.

The plan "will give millions of families resigned to financial ruin a chance to rebuild," Obama said before a packed high school auditorium in a state that's been racked by the housing crisis. But the president said the plan won't help every distressed homeowner. "All of us must learn to live within our means again."

Fannie Mae and Freddie Mac, the two mortgage giants, could receive an additional $100 billion each from the government. As a result, the plan's cost could be as much as $275 billion.

Homeowners whose total monthly debt payment is more than 55% of their income would have to go to credit counseling to get help from the plan.

Housing Secretary Shaun Donovan said help would not be available to homeowners whose mortgages are more than 50% above what their homes are worth because lenders would probably not approve new financing for people so far underwater.

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Obama said it "focuses on rescuing families who have played by the rules and acted responsibly," rather than speculators, home flippers and people who bought far more than they could afford.

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The plan earmarks $75 billion, mostly from financial rescue funds already approved by Congress. Lenders would be responsible for lowering interest rates so a borrower's monthly payment is no more than 38% of their income. The government would then help pay for the costs of reducing a borrower's loan payment so it becomes 31% of income.

The two interesting things we would point out from this article is that those who hare spending more than 55% of their income will never afford their houses. There should be some cut-off point. Perhaps 45% but definitely nothing above 50%. If you bought a property having to spend more than 50% of your income on housing you were basically a speculator of sorts and should not be allowed to be part of the program.

The second part is that if properties that have lost half of their value are not included in the program places like Nevada, Arizona, Florida and California will continue having problems. If the remaining residents can not get a reprieve due to the falling prices some areas in these states will be literal ghost towns.

In our next post we will look at some reactions to the plan.