Obama's Making Home Affordable Initiative

In a plan that promises to keep seven to nine million borrowers from losing their homes, the Obama administration announced its "Making Home Affordable" initiative. The Treasury Department released detailed guidelines about how it plans to help Americans refinance mortgages that would offer lower monthly payments.

A statement released by the Treasury Department said, "The present crisis is real, but temporary. As home prices fall, demand for housing will increase, and conditions will ultimately find a new balance. Yet in the absence of decisive action, we risk an intensifying spiral in which lenders foreclose, pushing area home prices still lower, reducing the value of household savings, and making it harder for all families to refinance."

To avoid intensifying the current downward spiral of the housing market, the Obama administration has a two-part plan. The first part addresses the need to modify the loans of up to four million struggling homeowners, while the second part helps five million borrowers refinance loans through government controlled Fannie Mae and Freddie Mac.

The $75 billion plan includes the following five features (as stated in the Treasury Department document):

* A Home Affordable Modification Program to Reach Up to 3 to 4 Million At-Risk Homeowners

* Clear and Consistent Guidelines for Loan Modifications

* Requiring That Financial Stability Plan Recipients Use Treasury Guidelines for Loan Modifications

* Allowing Judicial Modifications of Home Mortgages During Bankruptcy When A Borrower Has No Other Options

* Requiring Strong Oversight, Reporting and Quarterly Meetings with Treasury, the FDIC, the Federal Reserve and HUD to Monitor Performance

* Strengthening FHA Programs and Providing Support for Local Communities

The clear and consistent guidelines state that borrowers will have to provide their most recent tax return and two pay stubs, as well as an "affidavit of financial hardship" to qualify for the loan modification program. The Making Home Affordable plan "will not provide money to speculators, and it will target support to the working homeowners who have made every possible effort to stay current on their mortgage payments."

This plan is particularly aimed at homeowner with upside down mortgages, where the value of the home has declined and a borrower owes more than the home is worth. In order to refinance banks usually require at least 20% home equity, but under the Treasury plan the government backed loans will help homeowners take advantage of the current low interest rates.

Other highlights of the plan include helping borrowers with high total debt (including car loans and credit cards) by requiring them to enter HUD-certified consumer debt counseling. However, mortgages over 729,750 will not be eligible. The target affordability rate is to make loans no more than 31% of a borrower's income. The plan, which will run through 2010, only includes loans which originated before January 1, 2009.

This plan brings together lenders, investors, servicers, borrowers, and the government in the hopes of making significant strides in stabilizing the housing market and thus bringing the economy out of the worst recession in decades. Perhaps as homeowners feel less vulnerable, spending will increase in other sectors of the economy.

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