President Obama has been busy over the past few days (not that the President is ever just sitting around). Yesterday he was in Denver signing the stimulus package. He was in Colorado highlighting the green technology movement which is huge here and mentioned that Boulder might be the first “smart grid city” in the nation. In fact Blake Jones from Namaste Solar in Boulder introduced Obama. He also took the President and Vice President on a tour of the solar panel installation on top of the Nature and Science Museum in downtown Denver.
Today he was in Phoenix, a city greatly affected by the housing crisis, to sign the “Homeowner Affordability and Stability Plan”.
The goal of the mortgage relief plan is to help avoid foreclosures by providing incentives and a framework for refinancing and loan modification for at-risk homeowners. The administration estimates that the plan will offer assistance to as many as 7 to 9 million homeowners.
The first part of the plan is to provide access to low-cost refinancing for responsible homeowners suffering from falling home prices. The fact is that even a well qualified homeowner cannot get a new loan these days without 20% equity in the house. This part of the plan allows for a waiver of the 20% equity requirement if that is all that is holding up a refinance which will lower payments.
The problem I see with the implementation of this first part is that the homeowners who really need the help will not be considered “responsible”. Homeowners who have lost their job or those with poor credit will not qualify for this program.
The second part of the program provides a mechanism for at-risk homeowners to modify their mortgage payments to a reasonable level. This provision has some real promise to do some wide-spread good. If it works as written homeowners will be able to keep their homes, thereby reducing the negative impacts of foreclosures.
The goal is to reduce payments to between 31% and 38% of income. The program uses up to $75 billion to pay down, match and provide incentives to mortgage lenders and borrowers. Once a loan is modified the terms must keep the modified payments in place for a minimum of 5 years. For each modification the lender will receive and upfront payment of $1,000. They will also receive a payment monthly if the borrower stays current on the loan (not to exceed $1,000 a year for 3 years). Borrowers who stay up to date will receive an monthly balance reduction that goes straight toward reducing the principal balance on the mortgage loan.
Overall I think it is a step in the right direction and I hope that the mortgage companies do not drag their feet too much in its implementation.