President Obama outlined a plan Wednesday to help fix the home loan crisis by stemming the flow of foreclosures.
Homeowners have waited for months to see specific proposals about how to improve the housing sector, which has suffered from a rising tide of foreclosures and price declines in almost every market nationwide.
The Obama administration says its program, set to begin March 4, could help up to 9 million families. But analysts say the plan won't necessarily help all homeowners.
Is this finally going to provide some relief for homeowners?
"I think there's still a lot of people that are going to find themselves underwater in their mortgages and probably not getting much help out of this," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. Underwater means that someone's house is worth less than the balance on their mortgage.
Banking analyst Bert Ely of Ely & Company concurs. He says the plan is an attempt to work within the existing framework: "I'm very skeptical that they're going to be able to get anywhere near the number of mortgage modifications."
Michael van Zalingen, director of homeownership services for the Neighborhood Housing Services of Chicago, is optimistic that if the program works as devised, it will provide payment relief to about half of the 9 million struggling homeowners targeted by the plan.
Alex Pollock, a resident fellow at the American Enterprise Institute, says "average" homeowners will be the ones to foot the bill. And he says they won't benefit from the plan since they aren't delinquent on their mortgages.
Who is benefiting from this plan?
Homeowners on the verge of becoming delinquent or those who have missed a few payments are the prime candidates for assistance. The plan, van Zalingen says, is designed to assist those with high interest rates, but there are ways it could also help to improve the housing economy in the long term.
"If you can stop millions of foreclosures over the next few years, you get to stabilizing the housing market so that prospective homeowners can contemplate home ownership without such a wary eye," he says.
What obstacles does the plan face?
Baker says the plan won't change the fundamental problem for millions of people who are underwater with their mortgages: "Some of them will be forced into foreclosure. Some of them will opt to walk away from loans where they see no prospect of getting home equity."
For some people who do walk away from their homes, renting may be a better solution. That's especially the case if it means that they can rent for less than they'd have to spend to stay in their home — even with government assistance.
The administration's plan calls for lenders to reduce monthly interest payments to 38 percent of the mortgage holder's income. Then, the government would step in with funding to help reduce payments to 31 percent of the individual's income.
Baker notes that this 7-percentage-point funding assistance will be in the form of a check that goes directly to banks — not to homeowners. "We should be focused on trying to get as much money for homeowners as possible and zero for banks," Baker says.
Baker says another key part of the administration's plan enables lenders, with the assistance of the Treasury Department, to reduce monthly payments by lowering the principal due on the mortgage.
How soon will the plan begin to show results, and how will any progress be measured?
Housing experts say it will take at least three months to start seeing results. Positive signs would include an increase in the number of loan modifications, a decrease in reported delinquent loans and subsequently lower foreclosure filings compared to the prior year.
How will homeowners seek assistance?
Homeowners won't be able to dial a 1-800 number to ask for help. They'll have to go through their lenders, and lenders will have to take the initiative. This may simply create an incentive for lenders to bring in their worst cases to the government and then do a write-down to get those loans off of their books, Baker says.
What about Fannie Mae and Freddie Mac's role?
Fannie Mae and Freddie Mac are already part of the government's tool kit, but this proposal — which calls for increasing the amount of capital the government will put into these two mortgage finance giants — underscores that they've essentially been turned into "government housing banks," says Pollock of the American Enterprise Institute.
He says it makes sense to use the two mortgage financing giants as "vehicles for doing refinancing of troubled mortgages."
What are the long-term potential negative impacts for the mortgage industry?
The industry may have to brace for more losses that have yet to surface. Losses could arise as a result of continued layoffs and declining home values.
One part of the plan calls for a $10 billion insurance fund that the Treasury Department would create to discourage lenders from foreclosing on potentially viable mortgages. But Baker says lenders are likely to exhaust this money quickly because the problem is so big. He says establishing this kind of a fund is "bad policy."
"For whatever reason, there's a reluctance to still come to grips with the housing bubble," he says. Large chunks of the country — including most of the Northeast and many parts of California — are still in a bubble, he says, adding that the housing market has not yet reached its bottom.
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