Obama's Plan to Help People Save Their Homes and Pay Their Mortgages

As the economy slowly climbs out of a recession and businesses begin to post profits again, homeowners continue to default on their mortgages and high rates of unemployment continues to persist. In an effort to help those who have lost their jobs and are unable, or barley able, to pay their mortgage the government has announced an expanded program to provide temporary assistance to the unemployed as well as those who are "underwater" meaning that the value of their home has decreased so sharply that the liens against the property exceeds the appraised value. As many as 20% of homeowners now have liens against their homes that exceed the resale value (McArdle, 2010). The two ways the program will work is to either reduce the principal balance of the loan (by at least 10 percent) so liens are equal to the value of the property, then allow homeowners to refinance their loans with a Federal Housing Administration (FHA) loan. Another option is to require lenders to temporarily defer mortgage payments. Loans payments may be reduced or forbearance may be granted from three to six months for unemployed homeowners, similar to a deferment on a student loan. Lenders who participate will receive government incentives to do so from a $14 billion tax payer fueled fund called the Troubled Asset Relief Program (TARP).

The long term goal of this program is to assist homeowners who may temporarily be unable to pay their bills until they find gainful employment and to halt or slow the rate of foreclosures hampering the economy from improving. Many opponents to the program argue that the program is allowing irresponsible borrowers to be rewarded or bailed out rather then allowing the natural process of "moral hazard" to take place. In short, they believe that these borrowers should suffer the consequences of irresponsible spending. Banks also fear that lenders who could pay off their mortgage may apply for this assistance when they don't really need it. Also, many wonder if the three to six month forbearance is enough for unemployed borrowers as unemployment numbers have remained pretty stagnant, but have not vastly improved.

There are several arguments to refute this claim. For starters, many of these homeowners could afford these loans based on their incomes and net worth at the time the loans were underwritten. Many of these homeowners have lost their jobs and have seen the value of their home decrease by half the value or more due to the economic downturn and by no action of their own. While many homeowners' may have been spending outside of their means, but not without the support and guidance of the same lenders they are now unable to pay. Most of the lenders have been able to avoid their own moral hazard, so why shouldn't homeowners get some relief? Last, many lenders do not stand to recoup the principal balance for many mortgages that may end up being sold as a "short sale", or selling the home for less than the lien amount.

Until consumer spending and consumer confidence is restored the economy will not rebound and the value of homes will not rise. This is particularly vital for those who do not qualify for these programs but may be struggling in their own right.

Sources:

Lawder, D. (2010, March 26). FACTBOX-US plan to shrink mortgages, keep jobless in homes. Reuters.com. Retrieved March 29, 2010, from http://www.reuters.com/article/idUSN2614644020100326

Luhby, T. (2010, March 26). Obama announces expanded mortgage modification plan. CNNMoney.com. Retrieved March 29, 2010, from http://money.cnn.com/2010/03/26/news/economy/Obama_mortgage_relief/index.htm

McArdle, M. (2010, March 26). More Mortgage Meddling: Will it Work This Time? The Atlantic. Retrieved March 29, 2010, from http://www.theatlantic.com/business/archive/2010/03/more-mortgage-meddling-will-it-work-this-time/38092/