How Obama’s mortgage relief plan pencils out

By Lisa Mascaro

Saturday, Feb. 21, 2009 | 2 a.m.

President Barack Obama’s housing recovery plan landed with a thud this week as skeptics in Southern Nevada doubted it offered much help to a region where more homeowners are upside down on their mortgages than anywhere in the nation.

But in an interview with the Las Vegas Sun, the Obama administration’s secretary of Housing and Urban Development, Shaun Donovan, said that as details of the plan emerge, mortgage lenders and struggling homeowners will find that those initial perceptions are wrong.

The plan’s two-pronged approach was designed specifically to help Las Vegas and other hard-hit areas, Donovan said.

The most distressed borrowers in Nevada will benefit widely because the $75 billion in federal aid goes mainly to states whose homeowners need it most, Donovan’s agency says.

As Nevada’s anxious homeowners await the March 4 details, here is a more thorough look at the plan Obama released Wednesday, based on the interview with Donovan and subsequent reporting:

First, think of Obama’s Homeowner Affordability and Stability Plan as two somewhat separate parts.

The first part is for homeowners who are not behind on their payments but want to refinance at today’s historically low interest rates.

The second part is for homeowners in such distress that they are in “imminent danger” of foreclosure. This second part is the heart of the plan, for its primary purpose is to stanch the bleeding.

The first part works like this:

Many homeowners who want to tap into today’s low interest rates have been unable to do so because their loans are held by mortgage giants Fannie Mae or Freddie Mac, which have a 20 percent equity requirement.

These homeowners may be capable of making their payments, but simply want access to the cheaper rates that would give them a few hundred extra dollars a month.

But home values in Las Vegas have fallen 50 percent from their highs of a few years ago, and nearly half the state’s homeowners are upside down on their loans — meaning their equity has vanished. They owe more than the home is now worth and cannot meet the 20 percent equity requirement.

The Obama plan does away with that Fannie/Freddie equity requirement. It allows homeowners who are slightly upside down to refinance, too.

Under the plan you can refinance a Fannie or Freddie-backed loan if your loan-to-value ratio is 105 percent or less — meaning your new loan is no more than 5 percent above the home’s current value.

This is where the skeptics emerge.

Hard-hit Clark County boasted five of the nation’s top-20 upside-down ZIP codes. Loan-to-value ratios are at least 105 percent in those areas, with one as high as 120 percent, according to data from First American CoreLogic published in the fall.

How does the Obama plan help those people?

The answer is that it won’t help everyone. But Donovan, in his talk with the Sun, pointed out that while Nevada has some of the highest upside-down rates in the nation, most of the homeowners in the state still have loan-to-value ratios well under the 105 percent needed to refinance.

He’s right. Although Clark County has those five hard-hit ZIP codes, the statewide average loan-to-value rate is 89 percent, according to data from First American CoreLogic.

Donovan acknowledges that the plan isn’t for everyone. Rather, he said, “it’s focused on where it really helps to keep families in their homes, even if they’re deeply underwater. This is a serious issue in Las Vegas in particular.”

That’s where the second part of the plan kicks in. Here is how it works:

If you are a homeowner using more than

38 percent of your gross income for house payments, you could qualify for a government subsidy to help pay the mortgage — provided you also meet other conditions scheduled to be released March 4. (But you don’t have to be delinquent on payments to qualify.)

People could fall into this category for a variety of reasons: Perhaps they overreached and bought a house they could ill afford.

Maybe they took out an adjustable-rate mortgage that has reset to take a larger chunk of their paychecks. Or maybe they (or a spouse) lost a job as Nevada’s unemployment soared to 9.1 percent and what had been an affordable mortgage no longer is so.

People judged to be in this category can ask their lenders to agree to reduce the principal or interest to bring the mortgage down to the 38 percent level. The government will offer lenders some financial incentives to make the revisions.

Then, the federal government and the lender will share the costs of bringing that payment down from 38 percent to 31 percent of gross income. (That threshold, 31 percent of gross income, was for a long time the home affordability standard — until the go-go housing bubble tossed that out the window.)

Some people won’t like this plan because they fume at the thought of their tax dollars subsidizing their neighbor’s mortgage.

But the administration will argue that neighbors are in this together: Foreclosed properties drop neighborhood home values by 10 percent. The Obama administration thinks it will increase home values by 6 percent.

Banks are expected to favor helping homeowners who are not likely to default after the subsidy kicks in. The idea is to fix the problem long-term, not just delay foreclosures that are coming anyway. As Donovan said, there will be limits on how far the government will go to modify loans.

Banks will screen candidates by considering mortgage payment history, employment status and how much other debt the borrower carries. Nevadans have some of the highest credit card debt in the nation. So will Obama’s plan help Nevada? Or are the state’s housing problems too deep for the assist?

Jeremy Aguero, a principal analyst of the Las Vegas-based economic consulting group Applied Analysis, said: “Are people going to be helped? Yes. Is it going to help everybody? No.”

Bruce Marks, chief executive of Neighborhood Assistants Corporation of America — which has been leading tours of banking executives’ homes to protest foreclosures — doubts the Obama administration’s plan will help as many homeowners as it promises — 7 million to 9 million.

Not as many homeowners will qualify to refinance because they have second mortgages or their loans are not owned by Fannie or Freddie, for example.

As for the part of the program that could most help Nevadans in distress by subsidizing their payments, Marks says the government is just pushing the problem down the road. The program ends in five years and rates will be allowed to start creeping back up.

That’s no different than the adjustable-rate-mortgage problem that contributed to the mess, he said.

“We’re doing the same thing now,” he said. “Oh, this looks great — then what happens in three years or five years? Same problem.”

Clearly, the government is hoping the economy and household incomes will have recovered by then. Donovan’s department says that after the first five years of the program, rates will rise gradually, at no more than 1 percent a year, to the maximum prevailing government rate at the time.

Aguero said that in the end, many homeowners in Nevada may need to tap into the plan’s option of last resort: Allowing a judge in bankruptcy court to forcibly modify the terms of the loan.

This is the only part of the Obama plan that needs congressional approval, and it is a political fireball. Judges can write down loans for vacation homes in bankruptcy but not for primary residences. A previous effort to give bankruptcy judges this authority went nowhere last year in Congress after pushback from the mortgage banking industry.

This is the big stick carried by Obama’s plan. If judges are given the authority to write down loans in bankruptcies, lenders will have incentive to bargain with homeowners to lower their rates long before a family goes into bankruptcy.

Rep. Shelley Berkley supports this provision and will push for it in Congress.