President Barack Obama offered up hope on Feb. 18 to millions of Americans who are struggling with mortgage payments and facing foreclosure.
Speaking to a wildly enthusiastic crowd in a Mesa, Ariz., high-school auditorium, Obama said between 7 million and 9 million mortgages could be refinanced with his plan, which would cost $75 billion in TARP funds.
The president also put a face to a mortgage crisis most believe was responsible for a worldwide recession. "It begins with one house and one family at a time," he said. "They are responsible as anyone could expect them to be."
But then something happens. A job is lost or hours are cut, or a child gets sick and the mortgage payments are no longer affordable, the president said.
And since home values are often much less than owed on mortgage principles - thanks to the bursting housing bubble - the families can't refinance, and they end up in default, Obama went on to say.
He noted that the hypothetical family would be one of about 6 million families in the country facing foreclosures, 150,000 of those in hard-hit Arizona alone.
There's also a ripple affect. Values of homes near foreclosed properties go down, jobs related to the housing industry start disappearing, and the credit market dries up, making it difficult for anyone to get a home loan, according to the president. "In the end," he said, "all of us are paying a price for this foreclosure crisis."
There are limits to what the federal program will do, Obama said. It won't rescue the unscrupulous, it won't help dishonest lenders and it won't help speculators who made risky bets to buy homes not to live in but to sell, he said: "And it will not help folks who bought homes they knew they would not be able to afford to begin with."
There's another proviso. Only mortgages owned or guaranteed by Fannie Mae or Freddie Mac are covered by the rescue program, Obama said. The program would remove current restrictions for refinancing mortgages worth more than 80 percent of the home's worth.
The two lending organizations would receive less money in mortgage payments under that scenario, but the loss would be balanced out by a reduction in defaults and foreclosures, the president said.
A second approach would create new incentives to modify subprime loans, which represent only 12 percent of all mortgages but are responsible for half of all foreclosures, Obama noted. The plan would also establish clear guidelines for lenders to modify mortgages for primary residences, he added.
In addition, the new program would limit mortgage payments to no more than 31 percent of the borrower's income, Obama said.
On a third front, he said, the government will take major steps to keep new mortgage rates low by pumping up to an already-approved $200 billion into Freddie Mac and Fannie Mae to buy bundled, mortgage-backed securities. That will ensure that the two organizations can continue to stabilize financial markets and hold mortgage rates low, according to Obama.
"We also need to maintain transparency and strong oversight," he said.
And, finally, the plan also calls for the federal government to furnish $2 billion in competitive grants to communities that will try innovative methods to lower foreclosure rates low, the president said.
Obama called for a return to common sense to avoid the pursuit of profits that are literally too good to be true. "All of us have to learn to live within our means and not assume housing prices will go up 20, 30, 40 percent every year," he said.
Obama also said the rescue effort will require everyone to step back and take responsibility for their actions: "Those are the values we have to restore in this defining moment."
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