The Obama administration announced a larger-than-expected program Wednesday designed to help up to 9 million homeowners avoid foreclosure.
The plan, to be unveiled by President Barrack Obama this afternoon, relies heavily on the GSEs and could cost much more than the $50 billion expected.
The three-part plan would: help 3 million to 4 million borrowers that are "underwater" refinance through the GSEs, help 4 million to 5 million additional borrowers through the creation of a $75 billion Homeowners Stability Initiative, and provide additional support to Fannie Mae and Freddie Mac.
"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in subprime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments," President Obama is expected to say, according to prepared remarks.
Though the administration did not offer a total price tag, the plan appears to be much larger than the original $50 billion estimate. It includes an additional $100 billion of funding to Fannie and Freddie in addition to the $75 billion stability initiative, which includes a $10 billion loan guarantee plan with the Federal Deposit Insurance Corp. (FDIC).
The plan's centerpiece appears to be the Homeowners Stability Initiative, which is designed to help borrowers who have defaulted on their mortgages or are at imminent risk of default.
Under the initiative, Treasury will partner with lenders to reduce the monthly payments of a loan.
The plan calls on the lender to reduce monthly mortgage payments to no more than 38% of a borrower's income. After that point, the government will match further reductions by the lender to bring payments down to a 31% debt-to-income ratio.
Lenders will keep the modified payments in place for five years; after that interest rates may be gradually increased. Lenders may also choose to reduce mortgage principal, with Treasury sharing in the cost.
The administration said banking regulators will also create consistent loan modification guidance and added that any institution receiving Troubled Asset Relief Program (TARP) funds in the future must adhere to those guidelines. The administration said they would be based in part on the FDIC's modification guidelines released last year.
The plan provides numerous incentives for lenders to perform modifications and borrowers to stay current on loans. For example, servicers will receive a $1,000 fee for each eligible modification meeting the regulators' guidelines.
Servicers will also receive "pay for success" fees for each month the borrower stays current on the modified loan, up to $1,000 a year for three years. And the government will provide an incentive payment of $1,500 to mortgage holders and $500 for servicers for modifications made while a borrower at risk of imminent default is still current.
For borrowers who stay current on their mortgage, they will receive a monthly balance reduction payment of up to $1,000 each year for five years to reduce the principal balance of the loan.
The administration said it has also developed a $10 billion partial guarantee program with the FDIC to discourage lenders from foreclosing on mortgages that could be viable out of fear that home prices will fall even further later.
Further details were not immediately released, though it appears to differ from a proposal offered by FDIC Chairman Sheila Bair last year. That plan called for offering guarantees of up to 50% if lenders agreed to a systematic modification and the new loan defaulted after six months.
Under the new plan, Treasury will give a 50% partial guarantee to loans modified through the initiative to be paid if home prices depreciate.
The government is also allowing an additional 3 million to 4 million underwater borrowers to refinance through the GSEs if their loan is already owned or guaranteed by Fannie or Freddie. Previously, the GSEs could not accept a loan with a greater than 80% loan-to-value ratio.
As a result, Treasury announced it was doubling its funding commitment to $200 billion each for Fannie and Freddie.
After the GSEs were seized by the government in September, Treasury purchased preferred stock purchase agreements in each enterprise worth $100 billion.
Treasury also said it will continue to purchase the GSEs' mortgage-backed securities, and will increase the size of the enterprises' retained portfolios by $50 billion to $900 billion.
In a press release, Treasury Secretary Tim Geithner said the funding "will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners."Geithner said investors should not read the added commitment as a sign of possible losses ahead for the companies, but instead said it was designed "to provide assurance to market participants that Congress gave these companies a special purpose to support housing finance.
"Given the difficulties in the housing market today, we stand firmly behind their ability to provide that support," Geithner said.