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President Obama’s administration plans to make some adjustments to his $75 billion mortgage program to account for the expected growth in foreclosures. They are predicting that over the next five years, there will be millions of foreclosures due to a poor economy and high unemployment rates. They expect the revisions will push the Home Affordable Modification Program to reach its target of helping 3 million to 4 million homeowners avoid foreclosure through 2012.
The most significant change to the program, is a set of complex new incentives for banks and investors to reduce the principal on loans for homes worth less than what is owed. Another change would allow many unemployed homeowners to receive three to six months of reduced mortgage payments while they look for a job. The Obama administration will take money from TARP (Troubled Asset Relief Program) to pay for the expanded mortgage assistance.
The program was originally designed to help troubled borrowers modify mortgages and avoid foreclosure. However, it has only converted less than 200,000 temporarily modified home loans into permanent modifications. Early projections showed the program helping 3 million to 4 million struggling homeowners avoid foreclosure by the end of 2012. Unless their plan models a mortgage with a balloon payment, I don’t they’re going to reach their projected goals.
Earlier this week, the Commerce Department reported sales of new homes dropped to a record low. Our government is trying different methods to stimulate the market, from taking over Fannie Mae and Freddie Mac to offering tax credits. There is even a $1.25 trillion Federal Reserve program to buy mortgage backed securities. Regardless of these program, national home prices have fallen about 30% from their peak in 2006.
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