The President's Mortgage Modification Plan

Yesterday, President Barack Obama revealed what would amount to be “the largest federal foreclosure-prevention package in decades”. The plan would allocate more than $75 billion in aims of assisting U.S. home buyers in obtaining “more affordable mortgage terms.” The President’s plan would allow homeowners with little equity in their houses to refinance their mortgages, allocate funds to keeping a large number of homeowners out of foreclosure, and increase government funding of Fannie Mae and Freddie Mac.

The President assures that this program "will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans." It will allow homeowners to refinance “at a time of historically low mortgage rates” “as long as their mortgage does not exceed 105 percent of the current value of their property.” The program would also create financial incentives for lending institutions to lower required payments, attempting to make the mortgage aspect more financially attractive than foreclosure.

As expected, many have come out with criticism of this plan. Many bring up the issue of how second mortgages will be affected and handled through this program. Also, many feel that for most lending institutions, any participation in this program would be purely voluntary. Although Bankruptcy Court judges will be permitted to lower the principal of the mortgage to that of the current market value of the property, the lending institutions will not be required do modify mortgages in this way. Other issues of concern include mortgages being sold into securitized pools and the focus on owner-occupied housing with little to no mention of investor owned property.

It is hoped that offering financial incentives to lending institutions would be sufficient to have them voluntarily work with borrowers, but anytime something is voluntary there is a chance that somebody will not participate. At the same time, the President cannot force banks to comply as that is beyond the scope of his power. I would suspect that allowing Bankruptcy Court judges to modify the principal of the mortgage loan would bring up similar issues of the court exceeding its power. With these issues, and the unresolved issues mentioned above, it is hoped that the criticism levied against this plan will be used constructively to shape a plan that will assist distressed homeowners as planned.


For the full article from the Washington Post, click here.