We're breaking down the proposed housing plan for you. Why? Because even if you didn't take out a mortgage that you can’t afford and even if you're not "under water,” this plan affects us all in one way or another.
Why does the plan affect me?
For one, the rising tide of foreclosed homes—2.3 million in 2008—is a big reason why home prices keep falling. Foreclosed homes dragged down the median home price to $180,100, lower than in 2004 when the mortgage lending frenzy was in full swing. Low home prices are a problem because it means many people have mortgages worth more than their homes, but it’s the fact they’re still falling that’s more worrisome.
Many economists agree that “finding a floor” for home prices, meaning stopping them from falling further, is key to the economy’s overall recovery. Why? If home values are stable, then banks feel less nervous about loaning money that might not be paid back because the value of the home fell below the mortgage.
The flow of credit (loans) is crucial to making our economy work and if it’s too difficult to get or too expensive, even for people who can afford to pay back a loan, then the system is still stuck. And that’s bad for the economy, the market, and so on. Make sense?
Additionally, the plan may impact people simply by not including them as eligible for aid, possibly millions of people whose homes have lost too much value. More details will come on March 4 but here's what we know now:
- Cost: $75 billion. You'll see references to $275 billion, which includes $200 billion to encourage more lending from Fannie Mae and Freddie Mac, the big U.S. home lenders.
- The $75 billion is to help about 9 million people in two categories: 1) those who can't meet their monthly payments and are on the brink of foreclosure (lots of subprime loans here), and 2) those who can meet payments but whose mortgages are bigger than their home price (i.e., the mortgage is $300,000, the home is worth $295,000).
- The plan doesn’t help those with loans above $417,000 (jumbo loans), with loans not guaranteed by Fannie and Freddie, or those whose mortgages exceed 105% of the home's current value (i.e., the mortgage is $300,000 and the home price is $270,000).
- Help will come in two forms: 1) the government will pay lenders an incentive to modify home loans so that monthly payments are equal to 31% of the owners pre-tax pay, and subsidize any difference, and 2) will loosen restrictions to make it easier for people to refinance loans guaranteed by Fannie and Freddie.
- The money will come from the Troubled Asset Relief Program (TARP), the $700 billion Congress allocated in the fall to assist banks and the financial sector, meaning Congress doesn't have to approve the use of the money again.
Read the government fact sheet on the plan.
The big picture
Critics wonder if the plan bails out people who lied about their income to get a loan. In telling NBC about the plan, FDIC Chairwoman Sheila Bair said, "Thereare moral hazard issues here." And she goes on to make the point that by keeping these homes out of the market, meaning not for sale, it helps stabilize home prices. And that, we can probably all agree is something we can live with.
