And what I thought was going to be a $50 billion announcement became $275! Further hundreds of billions through Fannie & Freddie – once again the exact opposite of the right thing to do. Each step makes the math worse and the eventually outcome that much worse too. Reaction? Markets sells, gold goes up.
“Mandatory” loan modifications… that’s a good one. I’m disappointed too.
Obama Pledges $275 Billion to Stem Foreclosures, Help Borrowers
By Alison Vekshin and Roger Runningen
Feb. 18 (Bloomberg) -- U.S. President Barack Obama pledged $275 billion to a program that includes cutting mortgage payments for as many as 9 million struggling homeowners and expanding the role of Fannie Mae and Freddie Mac in curbing foreclosures.
The plan will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, the president said. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, he said.
“It will give millions of families resigned to financial ruin a chance to rebuild,” Obama said in Mesa, Arizona. “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”
The program signals the Obama administration plans to take a more aggressive stance to halt foreclosures than the Bush administration, which backed voluntary industry efforts. Record foreclosures in the past year are swelling the glut of properties on the market, forcing down home values and undermining homebuilders’ efforts to revive demand and lighten inventory by cutting prices.
“We tried voluntary, it didn’t work,” Federal Deposit Insurance Corp. Chairman Sheila Bair said today at a briefing in Mesa before Obama spoke. Bair has pressed the banking industry to accelerate loan modifications to keep people in their homes.
U.S. builders broke ground in January on the fewest houses on record as a lack of credit and plunging sales exacerbated the worst real-estate slump in 75 years. Confidence among homebuilders barely rose in February from a record low, an industry index showed yesterday, signaling the slump continues.
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. Treasury Secretary Timothy Geithner said the administration is in talks with Congress. “We are working on the best path to early enactment,” he said at the briefing in Mesa.
The Obama plan will use $75 billion, mostly 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.
The plan is “an absolutely necessary part of the recovery” and will “arrest this very damaging spiral” in home prices, Geithner said. Geithner added that detailed guidelines on putting the program into effect will be released March 4.
Treasury will share the cost when lenders reduce monthly payments by forgiving a portion of the borrower’s mortgage balance, the government said. The program may help as many as 4 million borrowers, the administration said. The average borrower’s home value could be stabilized against a price decline by up to $6,000.
“We think it is accurately aimed at homeowners at risk that are most likely to represent avoidable foreclosures, so it is likely to have a maximum impact where the dollar is committed,” said Robert Davis, executive vice president of the American Bankers Association, in a telephone interview.
Banks accepting U.S. help must adopt loan modification plans, the government said.
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. The cash will be applied to reducing the principal balance of the loan, according to a White House fact sheet.
Mortgage servicers will get $500 and loan holders $1,500 to modify loans 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.”
Focusing on reducing the mortgage principal would have been a “prohibitively expensive proposition,” said Glaser, a Washington-based mortgage-industry analyst.
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.
Fannie, Freddie Backing
“It is an indication they are not looking at shuttering them to move their responsibilities elsewhere,” said James Vogel, a debt analyst with FTN Financial in Memphis, Tennessee, in an e- mailed statement. “That has been a widely discussed option.”
The multi-step plan to help homeowners with mortgages owned or guaranteed by Fannie and Freddie will apply to so-called conforming loans, which are limited to $625,500 in the most expensive real-estate markets and $417,000 everywhere else.
An administration official, speaking to reporters in Washington, said the Treasury’s pledge of support for Fannie and Freddie is intended to build confidence that the government stands fully behind the two mortgage-finance companies. The official said the two aren’t yet close to reaching the initial limit of $100 billion in government support.
The additional $200 billion in funding will be made under a foreclosure-prevention law Congress enacted in July, the administration said.
6 Million Foreclosures
A family with a conforming Fannie Mae or Freddie Mac mortgage will save an average of $2,300 annually under the program, HUD Secretary Shaun Donovan said at the Mesa briefing. Donovan added that he expects as many as 6 million foreclosures in the next three years if this program isn’t implemented.
The White House also plans to improve Hope for Homeowners and other Federal Housing Administration programs to modify and refinance mortgages at risk of foreclosure.
Banks including Citigroup Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc. and Bank of America Corp. have agreed, at the request of lawmakers, to suspend foreclosure proceedings until the Obama plan is adopted. The Office of Thrift Supervision last week urged the lenders it oversees to suspend foreclosures.
The administration and the FDIC developed a partial- guarantee initiative directing the Treasury to create a $10 billion insurance fund to discourage lenders from foreclosing on viable mortgages out of fear that prices will fall further, according to the fact sheet. Geithner said the $10 billion will come from the financial bailout fund.
Treasury also will develop loan-modification guidelines for the mortgage industry that will be used for the administration’s foreclosure-prevention plan, the government said.
“We are disappointed they didn’t take a more aggressive approach,” John Taylor, president of the National Community Reinvestment Coalition, said today in a telephone interview. “This is all still very voluntary. You really have to make this mandatory or purchase the loans if you are going to accomplish what you want.”
Then CNBC parades JPMorgan CEO Jamie Dimon so that he can pump the financials and tell us all how good this program is. He was bragging about how many good and responsible citizens there are out there who are UNDERWATER on their homes, and yet they continue to make their payments! How nice of them to keep paying while underwater. Perhaps if they view the transaction for what it really is they wouldn’t be so happy to keep paying on an asset that is underwater, going further underwater and is ultimately owned by the bank anyway.
The right answer to all of this, of course, is to not encourage the bubbles to begin with, which is exactly what they are still doing. Creating inflation targets guarantees that bubbles will be created, especially at targets that are as astronomically high as 2%! Doesn’t sound high to you, then please Spend some Time with the Good Dr. Bartlett…
This target is exactly what Bernanke suggested in the latest Fed Meeting minutes…
“We expect inflation to be quite low for some time,” Bernanke said in the speech, without mentioning the word deflation.And don’t get me started on how inaccurately they measure inflation. No, never ending growth is not only not possible it wouldn’t be a good thing for anyone but a central banker.
The Fed minutes and forecasts indicated that officials are aiming to move public expectations at a 2 percent rate. Policy makers estimated long-term economic growth at 2.5 percent to 2.7 percent and an unemployment rate at 4.8 percent to 5 percent.
I Want My Bailout Money by Michael Adams the Health Ranger: