President Obama's plan has three major components.
The Homeowner Stability Initiative:
First, it seeks to provide low-cost refinancing for as many as 5 million Americans who aren’t behind on mortgage payments, at least not yet. If a bank agrees to issue lower-interest loans to homeowners who are current on payments, the loans could be sold to Fannie Mae and Freddie Mac, which were seized by the government in September.
The idea here is to allow access to refinancing for homeowners who don’t have much equity in their homes, or owe up to 5% more than what their homes are worth. These borrowers can’t qualify for refinancing under Fannie’s and Freddie’s current rules, and the change could result in savings on mortgage payments up to $2,300 a year. For lenders, it also would generate a new stream of revenue from refinancing charges and help put a floor under declining home prices.
A second leg of the plan makes another $200 billion available for mortgage finance. The Obama plan doubles earlier $100 billion agreements with Fannie and Freddie to provide a government subsidy to purchase mortgages from banks and other lenders.
The third and trickiest leg of the Obama plan involves using $75 billion in Wall Street rescue funds for a shared effort to help as many as 4 million distressed borrowers who are behind on their payments or facing foreclosure. Obama wants lenders to lower interest rates and extend the length of loans to make monthly mortgage payments no more than 38% of borrowers’ after-tax income.
Then, the government will step in and split the cost, dollar for dollar, to buy down those monthly payments until they account for no more than 31% of borrowers’ after-tax income.
Obama committed to publishing standardized guidelines for mortgage modifications and additional detail by March 4-an aggressive timetable.