Bloomberg is reporting Obama Pledges $275 Billion to Stem U.S. Foreclosures.

U.S. President Barack Obama pledged $275 billion to a program that will cut mortgage payments for as many as 9 million struggling homeowners and expand the role of Fannie Mae and Freddie Mac in curbing record foreclosures.

The plan also will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, according to a White House fact sheet. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, the announcement said.

“It will give millions of families resigned to financial ruin a chance to rebuild,” Obama said in remarks prepared for delivery at 10:15 a.m. in Mesa, Arizona. “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

The Obama plan will use $75 billion from the $700 billion financial bailout fund to match reductions lenders make in interest payments that lower borrowers’ payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent.

Companies that service mortgages will get $1,000 for each modified loan, and as much as $1,000 for three years when the borrower stays current, the government said. Homeowners also are eligible for $1,000 annually for five years for remaining current on their loans, according to the plan.

Mortgage servicers will get $500 and loan holders $1,500 to modify agreements as an incentive for the industry to seek out borrowers at risk of falling behind on their payments.

“The Obama team is betting that if they can afford to stay in the home month-to-month, that borrower is not concerned about what today’s value of the home happens to be,” Howard Glaser, former counsel to the secretary of the U.S. Department of Housing and Urban Development, said today in a telephone interview. “I think that’s the right bet.”

Treasury will increase the size of Fannie and Freddie’s retained mortgage portfolios, to $900 billion, allowed under the preferred stock agreement included in the September federal takeover of the two mortgage-finance companies.

Obama said he will support revamping U.S. bankruptcy rules to let judges reduce mortgages on primary residences to fair- market value as long as borrowers pay their debts under a court- ordered plan.

MarketWatch has some interesting quotes to consider in Obama sets aside $75 billion to slow foreclosures.

The Obama administration unveiled a plan Wednesday to help 9 million “at risk” homeowners modify their mortgages, committing $75 billion of taxpayer money to back the initiative.

The plan contains 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.

The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments,” President Barack Obama said in prepared remarks.

I do not buy this “acted responsibly” nonsense. If a person took out a loan greater than 38% of their income they most assuredly did not act responsibly.

Furthermore, the Obama plan increases the size of Fannie and Freddie, rewards servicers for no reason, giving them an incentive actually to waste taxpayer money, and rewards those who acted irresponsibly. Is this a good thing?

Addendum:
One question I have was not answered by either article. I am very concerned for the borrower’s sake about loan modifications turning non-recourse loans into recourse loans.

How many people will become unwitting interest slaves for the rest of their lives by signing up for one of these “loan modifications”? That is likely to happen if non-recourse loans become recourse loans.

Mike “Mish” Shedlock
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