(CNSNews.com) – President Obama debuted many of the details of his latest mortgage bailout proposal in a speech in Falls Church, Va., Wednesday, elaborating on the plan he first mentioned during his State of the Union address in January.
The central part of that plan is a new program for so-called underwater borrowers that would allow them to refinance at lower interest rates, even though they owe more than their home is currently worth.
“If you’re ineligible for refinancing just because you’re underwater on your mortgage, through no fault of your own, this plan changes that. You’ll be able to refinance at a lower rate. You’ll be able to save hundreds of dollars a month that you can put back in your pocket,” Obama said Wednesday.
The plan, which must be approved by Congress, would allow underwater borrowers – those whose mortgages are worth more than their homes – to refinance their loans, even if their loan is not owned or guaranteed by the government. Currently, only borrowers with loans owned or guaranteed by government-owned mortgage giants Fannie Mae and Freddie Mac could refinance if they were underwater.
The new program will be administered by the Federal Housing Administration (FHA) and will include several standards for eligible borrowers.
Those standards, outlined in a fact sheet published by the White House, stipulate that borrowers must be current for six months on their mortgages, must have a minimum credit score of 580, must have a loan that is within the FHA limit of $271,050-$729,750, and must be refinancing a loan on a single-family home they currently occupy.
Obama proposes a so-called streamlined application process, in which eligible borrowers will not have to provide much documentation that their home is underwater or that they can’t make their payments.
According to the White House, borrowers will not have to submit an appraisal – which would verify that their home is worth less than they owe – nor would they have to submit a tax return – which would verify income. All they would have to verify is that they are currently employed, although the White House does not say how they would have to do so.
Even the unemployed may qualify for the program, but banks will have to put them through the full underwriting process, rather than the new so-called streamlined process that requires less documentation.
In recognition that allowing underwater borrowers to refinance their loans is risky – because they often have little financial interest in making payments, even at lower rates – the Obama administration proposed two methods of alleviating some of that risk.
The first method, which will have to be negotiated in Congress, proposes to let deeply underwater borrowers – those with a loan-to-value ratio of 140 percent or higher – to write down the balance of their loans before they can qualify for a refinancing.
This approach would reduce the risk of letting underwater borrowers refinance because it would reduce the principal on the loan, meaning that borrowers would owe less than the original amount they borrowed. However, this approach would cause the banks holding the loans to lose money, since they will be forced to reduce the value of the loans currently on their books – effectively forgiving debt.
Neither the administration in its fact sheet nor Obama in his speech explained how they would convince banks to do this. Previous ideas have involved bailing out the banks to compensate them for their losses.
Obama also proposed a new tax on banks to help fund the $5-10 billion the program could end up costing. The White House explained that the fee will insulate the already troubled FHA mortgage guarantee fund from any losses caused by borrowers who refinance and then default anyway.
Obama said that the program would help those who have been victimized by the slumping housing market.
“What this plan will do is help millions of responsible homeowners who make their payments on time but find themselves trapped under falling home values or wrapped up in red tape,” Obama said in his Wednesday address.
However, the president also noted that the similar plans he has enacted have largely failed, admitting that they have not had anywhere near the impact he had hoped for.
“But I’ll be honest – the programs that we put forward haven’t worked at the scale that we hoped,” he said.