Effect of President Obama's New Mortgage Program on the Housing Market and Mortgage Market

The U.S Federal Reserve anticipates that in FY2009, the economy may shrink by a figure anywhere between 0.5% and 1.3%. It may be attributed to increase in unemployment, crisis in the housing market and credit crunch. Owing to the subprime mortgage crisis, incidence of foreclosure and bankruptcy have increased manifold. In fact, one of the reputed subprime lenders BNC Mortgage LLC, a subprime lending unit of Lehman Brothers had to close down.

The economic slowdown in United States and in the housing market specially has threatened many homeowners and many people have lost their homes already. To bring in some repose among the homeowners, President Barack Obama has unveiled his Mortgage foreclosure plan recently.

What are the key elements of President Obama's Mortgage Plan?

The mortgage plan is expected to help as many as 9 million households in warding off foreclosure.

• The new mortgage plan will enable 4 million to 5 million homeowners to opt for refinancing. Homeowners can do so through mortgage giants, Freddie Mac and Fannie Mae that are government sponsored.

• The plan has set uniform guidelines for modifying loans. It makes loan modification easier.

• It has strengthened Freddie Mac and Fannie Mae by purchasing more of their stake.

• Approximately USD$75 billion has been approved to lower monthly payments of homeowners.

• President Obama's new mortgage plan also allows Freddie Mac as well as Fannie Mae to hold mortgage backed securities worth USD$900 billion. Earlier it was USD$850 billion, an increase of USD$50 billion.

Effects of the mortgage plan-a brief overview

The plan will help about 4 million to 5 million household to refinance mortgage so that they don't reach a point of foreclosure. The plan will help the homeowners, who are on the brink of their mortgage payments default. Increasing mortgage payment default leads to falling home prices, local business gets hampered and consequently there is unemployment. The prevailing mortgage rates are very low. So, the homeowners can lower their monthly payments if they opt for refinancing. As per existing norms, homeowners who owe 80% of their property or more will not be able to refinance. However, there are also homeowners, who have been making payments regularly and have enough equity left in their homes, but due to the falling home prices are unable to take advantage of the low rates. To do away with this lacuna, Obama Administration announced the provision of refinancing through the mortgage giants, Fannie Mae and Freddie Mac. Refinancing could also help many families lower their mortgage payments every month. It can be better understood with the help of an example.

Scenario

Let's say a family availed a 30 year mortgage at a fixed rate, the loan amount being USD$250,000. The rate of interest is 6.5%. The value of the house at the time of loan approval was USD$300,000. The amount the family still owes currently is USD$200,000. To make matters worse, the value of the house nosedived by 15%. So, the value of the house as per today's market price is USD$2, 55,000. As per norms, you are required to have at least 20% home equity to avail lower rate of interest, which the household is not eligible for. Under the new refinancing option, the family can enjoy lower interest rates (the existing one) which also reduce the monthly payments by a considerable amount.