Obama's $75 Billion Help for Foreclosures

Obama's plan is an attempt to stop the wave of foreclosures and allow homeowners who owe more than their homes are worth to refinance. The plan was announced during his stop in Mesa, Arizona.

Obama wants to make it easier for people to rework or refinance their mortgages. The President said the plan, "will give millions of families resigned to financial ruin a chance to rebuild … prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone."

This plan will allow up to 5 million people to refinance their mortgages through Fannie Mae and Freddie Mac, both of which are privately held companies but under government control. The plan has three points: to help homeowners refinance; to help stabilize the housing market aimed at reaching up to 4 million at-risk homeowners; and to drive down mortgage rates. Government money is offered to entice homeowners, mortgage companies and mortgage investors to rework loans.

"This will allow millions of families stuck with loans at a higher rate to refinance," Obama said, "and the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures."

The White House also wants bankruptcy judges to rework the terms of mortgages in court. The banking industry has fought bitterly against such a law for years but Obama wants that attitude to change. The President's plan is not meant to help speculators. It is for keeping "hard pressed homeowners" in their homes.

The lending industry needs "clear and consistent guidelines for loan modifications" which are necessary to speed up the process of making loans more affordable and fair. Fannie Mae and Freddie Mac will use these new guidelines for the loans they own or guarantee. Also, companies receiving government money "will be required to implement loan modification plans consistent with Treasury guidance."

The plan offers incentives to get banks to modify at-risk loans before the homeowner gets behind in payments. They will receive an up-front payment of $1,000 for each eligible loan modification and $500 to banks and mortgage investors $1,500 if at-risk loans are modified before borrowers fall behind. The government said it would also help pay down the principal of certain mortgages by up to $1,000 a year for up to five years if the borrower hasn't missed any payments. This, of course, doesn't help homeowners who are already in trouble.

For a loan to qualify for modifications, lenders would need to bring the monthly mortgage payment down to 38% of a borrower's monthly income. Do the math - see how your monthly mortgage payment compares to 38% of your before-tax monthly income. The government would also match further reductions in the interest rate down to 31%.