Obama to unveil homeowner rescue plan today

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Obama will unveil the much awaited homeowner's rescue program today in Phoenix. The plan will try to stem the wave of foreclosures expected to top three million in 2009 if significant action is not taken. But the big question is, who should get the help?

Two competing groups of homeowners want help. About three million homeowners have already fallen behind on their mortgage payments. Many of them are in way over their heads and bought homes they could not afford using interest only loans or loans with teaser rates.

The second group (involving about 10 million homeowners and growing) include homeowners who are underwater -- owing more on their mortgage than the home's market value. This number goes up every month as home prices continue to drop.

A third group that will probably continue to grow in size are those who have lost their jobs and now can no longer afford to make mortgage payments.

According to details revealed by the New York Times, Obama aides expect the total packed will cost taxpayers $75 billion and help as many as 9 million families. Four million families near foreclosure would get help to stay in their homes and as many as 5 million more would be given the opportunity to refinance their mortgages by taking advantage of lower interest rates.

"The plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too," according to a fact sheet released by the White House said in a fact sheet.

The big question right now is which group should get the help and how can they be helped? Details are scarce right now as the Obama team does a good job of keeping the plans secret until Obama himself can unveil them today. But, the few details that have been revealed include:

* A program that modifies loans for people already behind on payments and near foreclosure. The government will use TARP funds to entice banks to reduce monthly payments for those who can't afford to stay in their home. As FDIC Chairwoman Sheila Bair has advocated, loans would be modified to be sure the loan payment is no more than about 31% of a person's monthly income. This modification could include reducing the interest rate, lengthening the term of the loan or other provisions. The costs of these modifications would be shared by the lender and the government. The lender would be expected to modify a loan to get into the 38% of income range and the government incentives would lower payments to 31%.

* Provide incentives to mortgage servicers to encourage them to modify loans and to proactively help at-risk borrowers while they are still current on their payments. This program would give servicers $1,000 for each modification and another $1,000 per year for three additional years for each year the borrower stays current. It would also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.

*Create a $10 billion fund to protect investors and servicers against further price declines.

* A Fannie Mae Freddie Mac program to give people with underwater mortgages the opportunity to refinance. Again indications are that the costs of lowering people's outstanding mortgage principal would be shared by the mortgage investors, banks and the government.

* Require all institutions receiving government funds to participate in a standardized loan modification program, which will also be applied by all federal agencies that guarantee loans.

* Call for passage of legislation to allow the "cram down" of mortgages as part of a bankruptcy filing. Right now if a person files bankruptcy the judge cannot change the terms of a mortgage. With new legislation already pending in Congress a bankruptcy judge would have the leeway to lower the principal of a loan if the house's market value is lower than the outstanding mortgage. Investors have threatened that they will stop financing mortgages if they know that a judge can unilaterally change the terms at a later date. But, knowing this stick exists will entice lenders and investors to modify loans before they get to a bankruptcy judge.

Halting, or at least slowing foreclosures, is the only way the housing industry has a chance of recovery. If foreclosures continue to mount, home prices will continue to drop as these bargain basement properties dominate the value of homes for sale.

Lita Epstein has written more than 25 books including the "The 250 Questions You Should Ask About Buying Foreclosures" and "Surviving a Layoff."
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