Obama Administration Releases Foreclosure Prevention Plan

The Obama Administration has released its much-anticipated foreclosure prevention plan. The plan is the most comprehensive to date that addresses the crisis in the housing market stemming from mounting foreclosures and falling home values.

The plan aids households that have been financially harmed by declining home prices by assisting them to more easily refinance their loans at a government-offered rate of 5.1%. While the plan does not compensate families for the lost values on their properties, it offers some relief through significantly lowered monthly mortgage payments, ranging, on average, between $150 and $200 or more.  These savings might also provide an important additive stimulant to the economy; assuming $200 per month savings, this translates into savings equivalent to six times the individual tax rebate included in the recently enacted economic recovery package.

Regarding households threatened with foreclosure, the plan also offers a broader set of tools than any other proposed government program.  By sharing with investors the cost to write down loans, the federal government takes a more active role in encouraging mortgage holders to be responsive to the pressing need to modify loans.  The plan also makes modified loan payments affordable, by dropping them to 31% of a borrower’s income. Finally, by offering financial incentives to servicers, the plan addresses the financial burden they experience when modifying loans, and encourages them to be proactive in identifying and addressing problem loans.

The plan is also helpful because of its support for bankruptcy reform.  Judicial modifications of loans held by consumers who face bankruptcy would allow families to modify the terms of their loans in a court of law.  This new access to the courts for struggling homeowners would create an additional incentive to encourage servicers to modify loans, rather than assigning authority to a third party.