The effects of the bail out strategy may finally filter down to American homeowners. President Obama's recent conference in Phoenix outlined a plan for providing relief to millions of people facing a home foreclosure, stabilizing the housing market and possibly driving down interest rates.
The biggest area of concern was for the people who were enticed into mortgages with low interest rates, only to increase at a later date. Now they are saddled with payments they cannot afford, and may also have lost their jobs.
The second group includes over 10 million households who cannot afford their monthly payments, but whose homes are now worth less than their mortgage.
The bailout solution comes in 3 parts:
First, help homeowners refinance to secure more manageable payments. This is part of the $75 billion program that will subsidize reductions to mortgages by reducing the monthly payment to as little as 31 percent of a family's gross monthly income. The initial focus will be on those who will undoubtedly lose their homes without intervention; as opposed to concentrating on speculators or multi-home owners.
The second part will give the mortgage companies and homeowners the stimulus they need to rework loans so that the homeowners can afford their payments and the lenders can minimize their loss. The bailout will offer lenders $1,000 up front for every loan reduced to at least 38 percent of the borrower's gross monthly income. If borrowers stay on track with their payments, further government incentives may be available.
Other options, would allow them to offer mortgages with less than 20 percent equity, or to waive the private mortgage insurance which adds hundreds of dollars to a monthly mortgage payment.
The lender can decide how to reduce the payments, but if they determine that these actions supersede the cost of foreclosing, then the borrower may still lose the property.
The third part intends to increase available credit by providing $200 billion in financial support to Fannie Mae and Freddie Mac to encourage them to invest in mortgages and mortgage securities.
Since not everyone can be helped, this approach is also dependent on a portion of the over extended homeowners just walking away. If there is a mass exodus of homes abandoned (as little as 10 percent), this could lead to a bigger housing crisis, which would in turn lead to a bigger bailout in the future.
Republican lawmakers raised the concern that the plan provides compensation to banks that never should have issued mortgages to unstable borrowers in the first place. In addition, certain homeowners obtained mortgages by falsifying asset statements, and questioned whether they should be eligible for assistance.
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