Wednesday, February 18, 2009

White House Tackles the Burst Housing Bubble

The burst housing bubble, which kicked off the economic crisis we find ourselves in now, is the problem the Obama administration is not attempting to solve with a proposal to help homeowners who are underwater and/or facing foreclosure:

The plan, which is more ambitious than expected, would spend $75 billion to help keep as many as four million families in their homes, and would help as many as five million more refinance their mortgages to take advantage of lower interest rates.

“The plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too,” the White House said in a fact sheet.


The plan would seek to entice lenders into lowering rates, and would offer homeowners a chance to shave thousands of dollars off their mortgages. The government would offer homeowners principal reductions of $1,000 a year for five years if they stayed current on their payments, and would give $500 to loan servicers if they modified loans before borrowers fell behind in their payments.

Or, if a lender lowered interest rates so that buyers were spending 38 percent of their monthly income on mortgage payments, the government would provide matching funds to lower that payment to 31 percent of income. The White House said such a reduction could equal $400 in monthly savings on a $220,000 mortgage.

The plan is necessary because, despite the fact that lenders acknowledge the foreclosure crisis and the importance of preventing further foreclosures, they seem incapable of working with homeowners on the scale necessary to even begin to address the problem.

Democrats in Congress are also working on a modification of bankruptcy law that would permit judges to "cram down" home loans in a Ch. 13 proceeding. In a op-ed I encourage you to read, Tom Evslin points out why this is also an important step in efforts to allow people to hang onto their homes (though there are those who have objections to the idea.)

UPDATE: From McClatchy, an article on the carrot (modification) and stick (cram down) approach of the Obama administration.

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