WASHINGTON – Feb. 27, 2009 – Against a backdrop of record-low new home sales, Housing Secretary Shaun Donovan told lawmakers the lending industry is set to launch the Obama administration’s $75 billion foreclosure prevention program next week.
Final details will be released Wednesday, but Donovan said the plan will allow borrowers with big debts from car loans, credit cards and unaffordable mortgages to have their home loans modified to lower the monthly payment, even if they are not in default.
Borrowers who owe up to 5 percent more than their home’s current value will be able to refinance, as long as their mortgages are held by mortgage finance companies Fannie Mae or Freddie Mac. At the same time, loan modifications will be available for borrowers who owe up to 50 percent more than their home’s current value, Donovan said.
A refinanced mortgage involves a new loan contract, while a modified mortgage involves changes to an existing one, such as extending the amount of time it takes to pay the loan back from 30 to 40 years, or lowering the interest rate.
Testifying before Senate lawmakers, Donovan said, “We expect to see large numbers of modifications happen very quickly,” and hope it causes foreclosure rates to drop as soon as April.
Foreclosures also were an issue in the House, where an expected vote on a housing relief plan was delayed. Democrats were at a stalemate over a measure that would allow bankruptcy court judges to reduce the principal and interest rate on mortgages for homeowners saddled with heavy debt.
The vote was derailed after a group of moderate Democrats expressed concerns about how the bill would affect homeowners who are not facing bankruptcy but are still struggling to make their mortgage payments.
Consumer advocates and most Democrats regard the measure as crucial, claiming it’s the only way to force loan servicers to take steps to help homeowners stay in their homes. Most of the mortgage industry remains ardently opposed, and has been fighting to block the proposal.
House leaders postponed a vote until Tuesday to give Democrats time to meet with Donovan about how the measure fits with the Obama administration’s housing plan. The Senate is expected to take up the legislation within two weeks.
In the Senate, Democrats praised the Obama administration’s plan to spend $75 billion from the $700 billion financial bailout fund to keep up to 4 million U.S. homeowners out of foreclosure.
But a prominent Republican, Sen. Richard Shelby of Alabama, was skeptical. He countered that subsidies will go to the same major lenders already receiving billions in taxpayer bailout money.
The administration’s plans are “a further bailout to the very banks that helped us get into our current situation,” Shelby said.
The delayed House vote and Senate bickering came amid more disquieting news for the housing market.
The Commerce Department reported Thursday that new home sales fell 10.2 percent to a seasonally adjusted annual rate of 309,000, the worst showing on records going back to 1963. It also was weaker than economists expected, and shattered the previous all-time monthly low set in September 1981.
The median sales price fell to $201,100 in January, a record 9.9 percent drop from the previous month. The median price is the midpoint, where half sell for more and half for less.
Lower prices, coupled with low mortgage rates, have helped restore affordability in some once-heated markets, but potential homebuyers are still wary.
The average rate for 30-year fixed mortgages this week was 5.07 percent, up slightly from 5.04 percent last week, but still near historic lows, Freddie Mac reported Thursday.
“Lower house prices and affordable mortgage rates have yet to spur housing demand,” Frank Nothaft, Freddie Mac’s chief economist, said in a prepared statement.