President Obama and the Treasury Department today unveiled a much anticipated foreclosure prevention plan that will rely heavily on mortgage financiers Fannie Mae and Freddie Mac to assist at-risk borrowers.
The so-called “Homeowner Affordability and Stability Plan” will attack foreclosures on a number of different fronts, depending upon the borrower’s situation, while providing incentives to participating homeowners, mortgage lenders, and servicers.
For those looking to refinance that have Fannie and Freddie owned or guaranteed loans, but are unable to do so because their loan-to-value exceeds 80 percent, guidelines will be eased to facilitate such refinancing.
This measure alone is expected to help between four and five million homeowners obtain more affordable and sustainable mortgage payments.
To ensure the government-sponsored entities are able to continue to support the mortgage market, Treasury will provide up to $200 billion in capital to the pair via preferred stock purchases.
Additionally, the Treasury will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities in an effort to keep interest rates low and improve liquidity in the secondary market.
Under the agreement, the GSEs’ retained mortgage portfolios will be increased by $50 billion to $900 billion.
Another three to four million homeowners will receive assistance through a $75 billion “Homeowner Stability Initiative.”
In some cases, government-sponsored modifications would provide below-market mortgage rates for five years, after which they would adjust upward at a moderate pace until reaching the average rate for a conforming loan during the time of the modification.
Once a modification is complete, borrowers will receive $1,000 per year, for up to five years, in incentive pay that will go towards the principal balance of the mortgage, if they continue to make payments.
Loan servicers will receive an upfront fee of $1,000 for each completed loan mod, as well as incentives of up to $1,000 each year for three years if the borrower stays current on the new loan.
Additionally, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before a borrower becomes delinquent
Lenders would be encouraged to modify loans thanks to a partial guarantee program, which would create an insurance fund at a size of up to $10 billion.
“Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index,” Treasury said on its website.
Treasury will develop uniform guidelines for the loan modifications, which will be used for the Administration’s new foreclosure prevention plan, and mirrored by lenders participating in government aid programs.
Other measures to reduce foreclosures include principal balance reductions during bankruptcy, $2 billion in neighborhood stabilization funds, and improved flexibility of Hope for Homeowners and other FHA loan programs.
Complete details will be provided on March 4 when the program is launched.