Overview: The Obama administration yesterday evening released the details of their Homeowner Affordability and Stability Plan, which has three main components: 1) Improve access to refinancing, 2) Restructure mortgages that are at risk of default, 3) Support low mortgage rates through Fannie Mae and Freddie Mac.
Details: The refinancing part of the program will allow homeowners, who have existing loans already backed by Fannie Mae or Freddie Mac, to refinance even if their loan-to-value has risen above 80%. The Obama administration estimates that the looser refinancing rules would provide the opportunity for 4-5 million homeowners to eventually refinance via the GSEs. This will make the Treasury and the Fed's MBS purchase programmes somewhat more powerful, as more borrowers would have the opportunity to refinance at the lower rate.
The plan also includes aid and guidelines for loan modifications. The government will provide $75bn in support for the program financed by TARP funds. The plan will encourage lenders to reduce the monthly mortgage payment to 31% of the borrower's gross income for so-called “at risk” homeowners. The costs will be shared between mortgage holders and the government. The lender would bear the cost of reducing the monthly payments down to 38% of income and the government would match dollar-for-dollar further reductions in monthly payments down to 31% of income. Lenders or servicers will receive $1,000 for each loan modification meeting the guidelines in the plan and the Treasury will provide $1,000 to the servicer each year (for three years) and the borrower (for five years) if the loan stays current. After five years, the mortgage rate would gradually reset to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with the Treasury sharing the cost. Finally an incentive of $1,500 will be paid to the mortgage holders if they modify at-risk loans before the borrower falls behind.
The plan also includes a partial guarantee of principal on modified loans. A $10bn fund will be designed to discourage lenders from opting to foreclose on mortgages out of fear that home prices could bring restruc-tured mortgages under water. The insurance payment will be linked to declines in the home price index. The full eligibility of requirements for the programme and the exact details of the programme will be announced on March 4
The Obama administration estimates that the plan could help as many as 3-4 million homeowners at risk of foreclosure. The latest data shows that nearly 1.5 million homeowners were in foreclosure in Q3 and an-other 1.8 million were more than 60 days past due on their payments. So helping 3-4 million homeowners at risk seems significant.
The final part of the program is securing lower mortgage rates by supporting GSEs. The Treasury will in-crease its preferred stock purchase agreement with each GSE from USD 100bn to USD 200bn in order to boost their capital if needed. The extra USD 200bn is not taken from the TARP fund but is funded by com-mitments made under the Housing and Economic Recovery Act. In addition, the size of GSEs' retained mort-gage portfolio allowed will be increased by USD 50bn to USD 900bn.
Assessment & Outlook: The US housing market continues to struggle and the rise in foreclosures is putting additional downward pressure on home prices. It is therefore positive that the US government is now targeting foreclosures directly – the estimated decline of 3-4 million in the number of homeowners at risk of foreclosure is significant. However, it remains to be seen whether the plan will ultimately have a major effect on prices and activity in the housing market. Regarding the refinancing part of the plan, we see this as generally good. It will make the Treasury and the Fed's MBS purchase programmes more powerful, as more borrowers would have the opportunity to refinance at the lower rate and it seems to be a relatively cheap way to support household income.
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