Alert February 24, 2009

Obama Administration Announces Homeowner Affordability and Stability Plan

The Obama Administration announced the framework of its $275 billion Homeowner Affordability and Stability Plan. The plan would allow homeowners with loans held or guaranteed by Fannie Mae or Freddie Mac having a loan-to-value ratio greater than 80% to refinance to a lower interest rate. The plan calls for (1) additional $200 billion in funding for Fannie and Freddie, (2) the Treasury Department to continue purchasing Fannie and Freddie mortgage-backed securities, and (3) increasing the size of Fannie and Freddie’s portfolios by $50 billion to purchase additional mortgage loans. The plan attempts to prevent foreclosures by incentivizing loan modifications. Under the plan, the federal government would match a lender’s interest payment reduction, dollar-for-dollar, that results from taking a borrower’s monthly payment from 38% of his or her monthly income down to 31%. Lower interest rates are expected to be in place for at least five years. Alternatively, lenders could choose to reduce principal balances, with the federal government sharing in the cost. Servicers would receive $1,000 for each eligible modification, and an additional $1,000 each year for up to three years as long as the borrower stays current. Servicers can also receive $500, and lenders $1,500, for modifying “at-risk” loans for which the borrower is still current. A borrower can receive up to $1,000 a year for up to five years towards reducing his or her principal balance if the borrower stays current. Lenders of modified loans would be provided a partial guarantee from the FDIC linked to declines in the home price index. The plan calls for “clear and consistent” mortgage modification guidelines, which the Administration expects to announce by March 4, 2009. Click here for a fact sheet on the plan.