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Mortgage Relief Plan by the Obama Administration

Seeking to stem the tide of housing foreclosures and face other problems with the residential real estate market, President Barack Obama unveiled a $75 million dollar Mortgage Relief Plan focused on helping as many as 9 billion Americans keep their homes. Blaming the housing crisis for creating many of the country's economic problems, the President stated that reducing the rate of foreclosures is the first step to getting the economy back on track.

The crisis has already cost Americans billions in home values and has decimated the home building industry. The financial crisis can also be linked to the failure of the mortgage market and many lending institutions which has little new capital to lend and continues to take losses on non performing loans. According to Moody's, of the nearly 52 million U.S. homeowners with mortgages about 27% owe more on their homes than the properties are worth. Without help from the government there is little motivation for these homeowners to keep their homes since they are underwater with their mortgage lenders. Lenders would also appreciate relief as they would rather have performing loans on their balance sheets than have to take all these properties REO. REO or real estate owned is the moniker of a property that goes back to the mortgage company after a foreclosure or unsuccessful real estate auction.

The crux of Obama's plan is to incent mortgage lenders to work out existing loans that are at risk of going into foreclosure. The ultimate goal is to cut monthly mortgage payments to sustainable levels that borrowers can afford currently defined as no more than 31% of an of a homeowner's income. Funding of the $75 billion dollar plan, originally estimated to cost $50 billion, will come from the $700 billion earmarked for the financial industry bailout passed by congress in the fall of 2008.

According to Obama, the mortgage relief plan is designed to help those Americans that have "played by the rules and acted responsibly." It is designed to help those families that have lost income due to employment difficulties or whose homes values have dropped to the point that it doesn't make financial sense to keep paying on them. According to the President, not everyone will be able to keep their homes. Individuals that bought homes to sell them, or bought more house then they could afford, may not get any relief through this plan.

Lenders that help their existing customer base should be rewarded with performing loans in the future. By extending additional credit through the Troubled Asset Relief Program (TARP) and stemming the rate of foreclosures the government is hoping to revive the residential real estate market. Once that market rebounds, values should rise to meet debt obligations and quell the desire of borrowers to default on their mortgages and support the values of these mortgages and mortgage backed securities. Through TARP the government is purchasing many of these troubled assets in order to reduce reserve requirements, allowing lenders to provide new mortgage loans and loosen the credit markets. For additional support, the government has promised to absorb up to $400 billion dollars of losses and double their loan guarantees for Fannie and Freddie Mac.

The president's announcement came a day after he signed a new $787 billion dollar economic stimulus package into law.

- by BetterTrades Financial Analysts