Will Obama's Foreclosure Reduction Plan Help You?

Last week, President Obama was in town to announce his plan to help stem the tide of foreclosures. Arizona has been particularly hard hit, which is one reason why he chose to come here to give his speech.

Mr. Obama began by describing how all of us are paying a price as a result of the home mortgage crisis – depressed home values, businesses closing, and high costs to local government.

So, he set out a four-part plan to try to stop the slide in home prices and shrink the foreclosure rate.

1. Refinancing options for homeowners holding mortgages with Fannie Mae or Freddie Mac, even if there is little or no equity in the home.

   This is great, but only applies to a small percentage of homeowners.

2. New incentives for lenders to work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure.

   In describing this part of his plan, Mr. Obama used phrases like "encourage lenders to modify mortgages" and "if... the lender agrees."

    

   I'm skeptical that lenders will be receptive to this, even with the additional incentives that the government will offer. Lenders just don't seem to have business models in place to be able to understand and implement new and changing plans for their customers.

   They seem to want to stick with what they understand – lend, service, and foreclose for non-payment.

    

   Only time will tell if this part of Obama's plan has any significant impact.

3. The government will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities so that there is stability and liquidity in the marketplace.

   How you feel about this point depends on if you believe that large government expenditures will ultimately lead to economic growth, business development, and consumer confidence.

4. Support for reforming our bankruptcy rules to allow judges to reduce home mortgages on primary residences to fair market value.

   Up until this point, Obama had talked about action that he could take with pre-approved funds and with his executive authority. However, this fourth point will require congressional modification of the bankruptcy code – an unpredictable and potentially lengthy process.

   There is actually pending legislation already for judicial modifications in bankruptcy (HR 200 and S 60). Of course, these proposals are constantly being modified, and there is no guarantee of what form they will have when or if they are passed.

   However, if judicial modification of a primary mortgage is passed by Congress, it may provide the “stick” that would encourage the lenders to take the “carrots” offered by Obama in point 2 above.

   As Obama noted in his speech, in a Chapter 13 bankruptcy, judges are currently allowed to modify or “cram down” any type of secured debt, except a primary residence. This is an odd exclusion that doesn’t really make a lot of sense, especially in this economic climate.

Hopefully, within the next few months, some of the open questions will be settled. But, for now, there is still a lot of uncertainty about your options for modifying the loan on your primary residence.