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The Obama administration yesterday released its long-awaited plan to stem foreclosures. It’s organized into three categories:

1.) Help for home owners making their payments but at risk of default and foreclosure.

Home owners with a Fannie Mae or Freddie Mac loan would be eligible to refinance as long as their mortgage doesn’t exceed 105 percent of the home’s current market value. Currently owners need to have at least 20 percent equity. Potential impact: 4-5 million households.

2.) Help for home owners already in default and in need of loan modification.

For lenders that voluntarily agree to lower a borrower’s payment so that it makes up no more than 38 percent of the borrower’s income, the government would share the cost of lowering the mortgage burden to 31 percent of income. Incentives to lenders to participate include a $1,000 payment.

Borrowers can receive up to $1,000 as an incentive to stay current on their new mortgage. Still in the works is a proposed provision that would allow bankruptcy judges to require loan modification (known as a cramdown) as part of a household’s restructuring. That provision requires legislation by Congress. Estimated potential impact: 3-4 million households.

3.) Doubled resources to Fannie Mae and Freddie Mac.

To encourage investors to buy the secondary market companies’ mortgage-backed securities, the government explicitly backstops them to up to $400 billion, twice the current amount.

The plan does not provide help to investors or to home owners who are in trouble with a second home, nor does it apply to homeowners whose mortgage is part of a private-label mortgage security that is not backed by Fannie Mae or Freddie Mac.

“The administration’s proposed plan, combined with provisions like the $8,000 first-time home buyer tax credit in the just-enacted American Recovery and Reinvestment Act, will help minimize foreclosures, shrink housing inventory, stabilize home values, and move the country closer to an economic recovery,” says NAR President Charles McMillan.

Source: REALTOR® Magazine Online

Home foreclosures are slowing as lenders wait for Congress to approve the stimulus package.

Foreclosures.com reported that foreclosures completed in January dropped 26 percent from December to 72,694, the fewest since April.

On Wednesday, the U.S. Office of Thrift Supervision told the savings and loans it regulates to suspend foreclosures on owner-occupied homes while the details of a plan to help borrowers reduce payments is worked out. The new plan is expected to hold monthly housing-related payments to 31 percent of income, as opposed to 38 percent, which was the previous standard. Workouts including lower payments will also be available to borrowers who are in danger of falling behind, but haven’t so far.

Meanwhile, Moody’s Economy.com predicts that 1.5 million homes will be lost to foreclosure in 2009, up from 1.4 million in 2008 and 750,000 in 2007.

“What the foreclosure-mitigation efforts will do is to keep the number of foreclosures from increasing substantially this year and next year,” said Celia Chen, senior director of housing economics at the firm.

Source: The Wall Street Journal, James R. Hagerty and Ruth Simon (02/12/2009)