President Barack Obama on Feb. 18 announced a plan to stabilize the faltering housing market by allowing up to 9Â million families to refinance or restructure at-risk mortgages through a $75 billion "homeowner stability initiative" and other incentives to keep homes out of foreclosure.
Obama is selling the plan—already being dubbed a "backyard bailout"— by stressing that foreclosures have a huge impact on entire communities and reduce the price of all homes.
How It Works
According to a fact sheet distributed by the White House, the plan, which Obama outlined in a speech in Mesa, Ariz., has three main components:
Allowing up to 5 million homeowners who have seen the value of their homes decline to refinance mortgages through the government-sponsored mortgage entities Fannie Mae or Freddie Mac
A $75 billion fund that would assist up to 4 million home owners to modify subprime mortgage loans so that payments would be no more than 31% of household income and incentive payments to servicers to successfully modify mortgages
Shoring up market confidence in Fannie Mae and Freddie Mac by doubling the government's investment in the companies to $200 billion each and increasing the size of their retained mortgage portfolios.
Obama also expressed support for a change in bankruptcy rules that would allow judges to modify first-mortgages held by defaulting homeowners. Such modifications are currently only allowed for mortgages on multifamily homes, vacation houses, and investment properties. The financial services industry has been opposed to the "cramdown" proposals.
In Arizona—one of the areas of the country hardest hit by declining home prices —Obama stressed that foreclosures affect not only those who are being forced out of their homes but the surrounding neighborhoods as well. "In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to continue to deepen," Obama said.
Next: The Political Sell
That argument that all homeowners have a stake in the outcome is key to persuading homeowners who are paying their mortgages to support a plan that helps those who cannot do so, said Howard Glaser, a former Clinton Administration housing official and a consultant to Fannie Mae and Freddie Mac.
"A $500 check to your next-door neighbor is more 'real' to many people than the abstraction of shoveling hundreds of billions into bailouts for banks headquartered thousands of miles away," Glaser said in a report on the plan. "Obama will need to employ all of his communications skills to explain why all Americans benefit from using taxpayer funds to help homeowners in trouble."
Obama said that the plan "will not save every home" and will not apply to speculators or "rescue the unscrupulous or irresponsible…And it will not reward folks who bought homes they knew from the beginning they would never be able to afford." Guidelines for the mortgage modification plan will be announced when the program begins on March 4.
But it remains unclear whether that will overwhelm critics who argue that the plan promotes "moral hazard" by encouraging people to take excessive risks knowing that someone will bail them out.
"The government could end up subsidizing mortgage borrowers, lenders, and servicers to the tune of more than $10,000 as part of this program." said Mike Larson, real estate and interest analyst at Weiss Research in Jupiter, Fla. "How is that fair to borrowers who played by the rules…That's what many Americans are going to be asking, and what many politicians are going to be hearing from callers."
Mintz is news editor for BusinessWeek.com in New York.