Barack Obama’s announcement this week outlining $75 billion in direct funding to help homeowners stay in their homes, and up to $200 billion designed to allow for the government-controlled mortgage industries, Fannie Mae and Freddie Mac, to issue low-rate (5.1 percent) mortgages.
The plan has been generally lauded in in the housing community, but some fear that the move does not go far enough, particularly in the plan’s omission of a mechanism that would allow assistance for homeowners threatened with foreclosure in instances where the principal loan amount exceeds the value of the home.
John Taylor, president and CEO of the National Community Reinvestment Coalition, praised the plan for creating the ability for people to refinance their loans at the government-issued 5.1 percent, offering relief on monthly mortgage payments, the plan “does not acknowledge the need to create sustainable loan modifications when interest-rate buy-downs are, by themselves, insufficient.”
Nationally, home prices have fallen by 25% and continue to drop as the housing market becomes increasingly unhinged. In areas where foreclosures are heavily concentrated, home values have fallen by 30% to more than 50%. The plan does not acknowledge the need to create sustainable loan modifications when interest rate buy-downs are, by themselves, insufficient.
In addition, loan modifications under the program are temporary and would expire after five years. Yet, it is not clear why a consumer would be able to afford a loan five years from now that they cannot afford today. Having these modifications unwind after five years might spur the problem down the road, having it reappear just as the housing market and economy are beginning to recover.
Taylor also pointed to the voluntary nature of the program as a potential concern: “[That] should be revisited if the current incentives are unsuccessful in promoting broad-scale loan modifications.
Sheila Crowley, president of the National Low Income Housing Coalition, worried that “the plan does not appear to provide relief for renters who are losing their homes because their landlords have been foreclosed upon. Approximately 40% of the households who face eviction because of foreclosure are renters. In most states, renters’ tenancy is terminated automatically at foreclosure of a property. In many states, there is no requirement that tenants even be notified of foreclosure. However, in New Jersey and the District of Columbia, tenants are protected from eviction due to foreclosure.”