Relief at Last: Obama Acts on Foreclosures

President Obama has signed legislation that will impact our nation’s foreclosure crisis.  It is not a moment too soon, and it remains to be seen if this is enough action, but at least we finally have policies that are designed to work directly on the root problems that are undermining our economy.

Obama’s plan, the Homeowner Affordability and Stability Plan (pdf here), will be announced in Phoenix later this morning. It has some great elements.  The plan will let homeowners refinance their mortgages, which Obama believes will save a homeowner with a $200,000 mortgage as much as $2,300 per year.  It is also a good deal for bankers, because it increases the number of people who will be applying for mortgage refinancing products.

Then there is the $75 billion fund dedicated to bringing down payments.  Lenders who agree to enter into a modification plan will be responsible for bringing payments down to 38 percent of income.  Then, for each additional percent drop, the government will match the lender’s costs on a 1-for-1 basis, down to 31 percent.  It is not clear yet how eligibility will be determined for this product, although the plan indicated that borrowers who are current will not be excluded from the process.  It will be limited to owner-occupied homes.

It comes as foreclosures are skyrocketing.  The Mortgage Bankers Association reported that 9 percent of mortgages were in arrears or in foreclosure at the end of 2008.  Credit Suisse suggests that by 2012, 16 percent of homes with a mortgage will be in foreclosure.   In California, more than 530,000 homes are in foreclosure.

The announcement doesn’t emphasize an additional intervention, but it could be very significant.  The plan will provide an additional $2 billion in funds for the Neighborhood Stabilization Program.  This will go into projects by cities, in conjunction with non-profit housing developers, to revitalize areas hurt by foreclosure.  HUD has not yet made its decisions on the initial $3.92 billion of NSP funds, but that should be coming soon, as early as this week in North Carolina.  This is great news.