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President Obama Signs $75 Billion Foreclosure Bailout

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By : John Cutts    99 or more times read
President Obama officially unveiled his $75 billion dollar plan to quell the rising tide of foreclosures and begin to stabilize the countryís precarious housing market.

The president spoke from Phoenix, Arizona, a town that only a few years ago enjoyed a huge boom in real estate, and is now one of the hardest hit by shrinking property values and foreclosures. Arizona saw over 117,000 foreclosures in 2008, the third highest amount of foreclosures in the entire country.

As if to reinforce the importance of the presidentís plan, the US Commerce Department announced today that housing starts in January fell 16.8%, a much higher decrease than Wall Street expected. Many economists forecasted only a 4-5% drop. With over 1 million homes currently in foreclosure and another 2 million homes expected to fall into foreclosure this year, housing starts will likely continue to decline.

Families facing foreclosure fall into one of three categories. The first, most common category is homeowners who have defaulted on their payments. They are at least one month behind on their payments and are most likely to lose their homes quickly.

The second category is homeowners who are current on their mortgage payments, but have either suffered some form of hardship that has reduced their income, or experienced an increase in their mortgage payment.

The third category is homeowners who are current on their mortgage payments and still find the payment amount to fit comfortably into their budget. However, drastically falling home values have put the value of their house far below their mortgage balance, prompting many homeowners to simply walk away from their homes.

The presidentís plan will focus largely on two of the three major categories: those homeowners who have already defaulted on their mortgages, and those who are current but have experienced loss of income and/or increase in mortgage payments.

For these homeowners, the presidentís plan will allocate about $75 billion of the TARP fund to encourage banks and lenders to refinance or modify existing mortgage loans into lower interest rate loans with more affordable monthly payments.

According to Rep. Barney Frank, D-Mass, the goal of the plan is to modify a homeownerís mortgage so that it does not exceed 31 percent of their income. This can be accomplished if the lender agrees to either lower the interest rate, lengthen the amount of time a borrower has to repay the loan, or a combination of both.

But the question remains: What about the third category? What about homeowners who are current on their mortgage payments, but drastically falling home values have put the value of their house far below their mortgage balance?

This group is larger than the first two categories combined. It includes more than 10 million families that can afford their current monthly payments but are upside down on their mortgage. They can keep their homes if they want to, but some may decide to default on their loan and voluntarily walk away, instead of continuing to pay for an investment that might never recover.

Bailing out these upside down homeowners would be incredibly expensive. Due to massive market price declines, there is about $500 billion in upside down mortgage debt. Unfortunately, no one can predict what percentage of homeowners are likely to default and walk away. This would require the government to spend hundreds of billions of dollars helping people who donít need help, just to quell a possible rise in foreclosures.

While the presidentís plan has generated a large amount of support and positive feedback, one challenge remains. President Obama must focus on executing his plan. The previous administration allocated the funding, but dropped the ball when it came to execution, expectations, and follow up. If Obama is to succeed, he will learn from the mistakes of his predecessor and apply that knowledge toward a foreclosure bailout that works.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.

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