Advantages / Disadvantages of $75 Billion Foreclosure Relief

The foreclosure crisis was on the menu on Wednesday as President Obama served up a plan to help “at-risk” homeowners modify their mortgages. The plan comes only one month after a recent study released by RealtyTrac revealed that the housing market saw a 57% increase in foreclosures as compared to a year earlier.

According to Obama, the mortgage plan was created in an effort to help current homeowners avoid potential foreclosure. It will be broken into two programs:

  • Fannie Mae/Freddie Mac Refinancing. The first program will allow 4-5 million homeowners who owe more than 80% of the value of their homes on loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance, even if they have negative equity.

  • Loan Modifications. The second program will make $75 billion available to help 3-4 million homeowners modify their mortgages into lower monthly interest rates through any participating lender.

The first program will be funded by the Treasury Department by purchasing $200 billion of Fannie and Freddie preferred stock, as well as mortgage securities backed by the companies, to raise $900 billion. The second program will receive $25 billion from Fannie and Freddie and $50 billion from leftover TARP funds.

Obama also plans to give bankruptcy judges the option of lowering mortgage interest rates for 5 years for homeowners in trouble. The plan is projected to have a huge effect on foreclosure numbers as it attempts to bring down each homeowner’s payment to 31% of their pretax income, a feat that can hopefully keep millions in their homes this year.

Do you think this is the right direction for a recovery of the housing market?