President Obama Introduces Homeowner Affordability and Stability Plan

In an effort to stabilize the housing market and assist troubled homeowners in avoiding foreclosure, President Barack Obama unveiled the Homeowner Affordability and Stability Plan on February 18, 2009. The plan appears to offer more specifics than the Financial Stability Plan announced the previous week. Nevertheless, details associated with specific aspects of the plan remain elusive.

The Homeowner Affordability and Stability Plan is a key component of the president's comprehensive strategy to stimulate the American economy and impede the ongoing impact of the global recession. The plan, along with parts of the American Recovery and Reinvestment Act signed into law on February 17, 2009, seeks to stabilize the housing market, increase lending and the flow of consumer credit, and reform the American financial system.

Stressing that the mortgage crisis and the greater financial crisis are "interconnected," President Obama summarized the core elements of the Homeowner Affordability and Stability Plan as follows:

Refinancing of Fannie Mae / Freddie Mac Mortgages

Due to the collapse of the housing market, many families and individuals are "underwater" with respect to their mortgages. In other words, they owe more on their mortgages than their homes are presently worth. Families who owe more than 80 percent of the value of their homes are currently ineligible for refinancing through Fannie Mae and Freddie Mac. Under President Obama's plan, approximately four to five million homeowners that have mortgage loans with Fannie Mae or Freddie Mac but who are ineligible to refinance through Fannie Mae or Freddie Mac will now have the opportunity to refinance their mortgages at lower rates. Detailed guidance regarding the implementation and terms of such refinancing has not yet been published. Borrowers whose loans are not held by Fannie Mae or Freddie Mac will not be eligible for refinancing assistance under the plan. The scope of the plan leaves many troubled borrowers without new options.

A $75 Billion Homeowner Stability Initiative

The Obama administration will create a Homeowner Stability Initiative intended to assist up to four million homeowners at risk for defaulting on their mortgages. This appears to be the plan's centerpiece. The goal of this initiative is to reduce homeowners' monthly mortgage payments to "sustainable levels." This will be achieved by requiring participating lenders to reduce borrower payments to no more than 38 percent of a borrower's income. Federal funds will match lenders dollar-for-dollar to reduce interest payments and bring the ratio down to 31 percent. The lender cannot increase the interest rate for five years, after which it may gradually step it up to the conforming interest rate effective at the time of the modification. It is not clear whether the five-year rate reset is sufficient or whether it simply delays the inevitable.

In return for cooperation between lenders and borrowers, the government will subsidize a portion of the difference between the original mortgage payment and the modified payment using money allocated under the Financial Stability Plan announced earlier this month by Treasury Secretary Timothy Geithner. Eligibility criteria for participation in the initiative have not yet been announced.

The initiative also provides monetary incentives to servicers for making eligible loan modifications and to borrowers for staying current on their loans. Servicers will receive an up-front fee of $1,000 for each eligible modification established under the initiative and an additional "pay for success" incentive of $1,000 per month as long as the borrower is current on the loan. Again, there is no guidance regarding implementation of this program. Keep in mind the servicers do not actually own the loans at issue. Therefore, it is not entirely clear whether the servicers have contractual rights to any or all of the $1,000 up-front fee and the $1,000 "pay for success" incentive or whether these incentives must be shared with the ultimate owner(s) of the underlying mortgage. Further, the initiative does not address the fact that in many cases, the servicers are prevented by contract from modifying mortgages they service. There does not appear to be any protection for servicers from potential lawsuits should they modify mortgages without contractual authority to do so. This problem has impeded progress on a solution to the foreclosure problem for some time. It remains to be seen whether these incentives will be enough to obtain servicer participation.

Under the initiative, borrowers that remain current with their loans can receive up to $1,000 each year for five years. Additional incentives are available for servicers and borrowers for the modification of loans that are not yet in default but are otherwise "at risk." What constitutes an "at-risk" loan eligible for modification is not yet defined.

Detailed guidance regarding the implementation of the Homeowner Stability Initiative is expected to be promulgated by the Treasury and published in early March 2009. All financial institutions receiving funds under the Financial Stability Plan will be required to implement loan modification plans that are consistent with the uniform guidance developed by the Treasury. However, the Obama administration also stated that such guidelines should be implemented across the entire mortgage industry, which would seem to include other financial institutions that may not have received government funding.

Increased Funding Commitment to Fannie Mae and Freddie Mac

Using funds authorized by Congress in 2008 under the Housing and Economic Recovery Act, the Treasury and the Federal Reserve will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities. Treasury will provide up to $200 billion in capital to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to maintain mortgage affordability by keeping interest rates down.

Other Program Components

President Obama suggested that the government would support additional reforms to stem the tide of foreclosures and help families stay in their homes. Such reforms will include competitive community grants aimed at reducing foreclosures and enhancements to the failed Hope for Homeowners Act and other Federal Housing Authority programs aimed at modifying and refinancing at-risk borrowers on a largely voluntary basis. Additionally, the Obama administration will support changes to bankruptcy rules to permit judges to modify mortgages on primary residences. At present, the changes to the Bankruptcy Code necessary to effectuate such modifications are under intense discussion and negotiation.