One part of the government's Homeowner Affordability and Stability Plan is a $75 billion program targeted at the three to four million at-risk borrowers.
Under the program, a lender would reduce a borrower's monthly payment to 38% of their income, while the government will match funds to push the ratio down to 31%.
As an incentive to get servicers to modify loans, the government will give them $1,000 upfront for each loan modified with an additional $1,000 annually for up to three years if the loan remains current. Homeowners will also get $1,000 per year for five years to reduce their principal. For those borrowers who have no other option than bankruptcy, a judge would be allowed to cramdown the mortgage; however, as Societe Generale warns, "longer term it could raise the cost of credit for households."
Societe Generale analysts said that the step up in foreclosure mitigation efforts should contribute to stabilizing home prices. In addition, they believe that while not all loans with negative equity are eligible to participate in the plan, "it is nonetheless capturing a significant share of "at risk" loans and should therefore be very helpful in reducing foreclosures."
Deutsche Bank Securities analysts, however, said that while policy measures already in place have helped "housing affordability", they don"t believe it is "enough to prevent substantial further declines in either residential investment or home prices over the quarters ahead."
Analysts note demand factors are currently negative on balance, but over the year ahead there could be improvement as household income stops falling and credit availability stops tightening. On the supply side, the overhang of vacant homes will continue to exert downward pressure on home prices for at least the next year, they believe. While the foreclosure mitigation efforts will provide some relief, they don't believe it will prevent a significant pickup over the year ahead.
At this time, they predict home prices will continue to decline through the first quarter of 2010. Using the Office of Federal Housing Enterprise Oversight (OFHEO) home price index, Deutsche analysts projected a total peak-to-trough decline in home prices of nearly 15%, and for Case-Shiller a decline of at least 30%. Based on the declines to date, they say the OFHEO index still has nearly a 10% decline going forward, while Case-Shiller has an additional 10+% to go.
Factors that will continue to weigh on home prices, Deutsche said, are the supply overhang, rising foreclosures, deteriorating macroeconomic conditions, and ongoing tightness in the credit markets.
While some easement is expected from the Obama plan, they believe it helps "remove tail risk, but they will not, in our view, keep U.S. home prices falling through 2009 before bottoming in early 2010," analysts said.