Obama's $75 billion housing fix (© none)

President Obama announces his housing plan at Dobson High School in Mesa, Ariz. © Jim Watson/AFP/Getty Images

WASHINGTON — The Obama administration announced new plans Wednesday to make it easier for up to 9 million people to rework or refinance their mortgages, as the White House began an aggressive effort to stabilize the housing market.

In describing the strategy during a press conference in Phoenix, President Obama said the plan "will give millions of families resigned to financial ruin a chance to rebuild … prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone."

A central element of the plan would allow up to 5 million people to refinance their mortgages into more affordable products through Fannie Mae and Freddie Mac, according to a summary of the plan.

A total cost of the effort wasn't immediately clear, though it could eclipse more than $275 billion because of new commitments to the Fannie Mae and Freddie Mac.

The Obama administration's plan has three main elements: an effort to help homeowners refinance; an effort to help stabilize the housing market through a $75 billion initiative aimed at reaching up to 4 million at-risk homeowners; and an element that aims to drive down mortgage rates.

"The effects of this crisis have also reverberated across the financial markets," President Obama said. "When the housing market collapsed, so did the availability of credit on which our economy depends."

The administration pledges government money to separately entice homeowners, mortgage companies and mortgage investors to rework loans. It would help a variety of homeowners, including those whose mortgage is more than the value of their home.

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The housing plan is part of a broader effort by the government to address the volatile economy and it comes after Congress passed a major stimulus package and the Treasury Department released its plan to shore up the banking sector.

Fannie Mae and Freddie Mac, which are privately held companies under government control, figure prominently in the housing plan.

The companies generally are prevented from owning or guaranteeing mortgages that are more than 80%of a home's value, as those loans are seen as much riskier. But the Obama plan would allow them to buy or guarantee these riskier loans if they already own or guarantee them. This could be possible if a $80,000 loan was purchased by Fannie Mae last year for a $100,000 house, but the house is now worth just $75,000.

"This will allow millions of families stuck with loans at a higher rate to refinance," Obama said. "And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures."

The government said it would increase its limits on the size of Fannie Mae and Freddie Mac's portfolios to $900 billion each up from $850 billion. Treasury also said it would increase its funding commitment to both companies "to ensure the strength and security of the mortgage market and the help maintain mortgage affordability." (See the statement.)

Treasury also plans to increase its preferred stock purchase agreements with the companies to $200 billion each from $100 billion each.

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"The increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners," Treasury Secretary Timothy Geithner said.

The previous level was set when the companies were taken over by the Bush administration in September. Allowing the companies to buy or guarantee riskier loans could give them a bigger role in stabilizing the housing market but it could also expose them to heavier losses in the coming months.

The White House also called for a controversial provision to allow bankruptcy judges to rework the terms of mortgages in court. The banking industry has fought bitterly against such a law for years, though some banks have recently softened their stance.

The White House summary says its plan would not help speculators, and instead would be aimed at keeping "hard pressed homeowners" in their homes. They also said they are working on "clear and consistent guidelines for loan modifications," which many have argued are necessary to speed up the process of making loans more affordable.

Fannie Mae and Freddie Mac will use the new guidelines for the loans they own or guarantee.

All companies receiving government money "will be required to implement loan modification plans consistent with Treasury guidance," the summary said.

The plan includes multiple incentives to prod servicers to modify loans. Servicers can receive an up-front payment of $1,000 for each eligible loan modification that meets certain criteria. The government said it would pay servicers $500 and mortgage investors $1,500 if at-risk loans are modified before borrowers fall behind. The government said it would also help pay down the principal of certain mortgages by up to $1,000 a year for up to five years if the borrower doesn't miss any payments.

For a loan to qualify for modifications, lenders would need to bring the monthly mortgage payment down to 38% of a borrower's monthly income. The government would match further reductions in the interest rate down to 31%.

The housing plan contained many more details than a plan released last week to address the banking sector, which sent financial markets tumbling amid criticism that the effort was light on specifics.

The Obama administration met repeatedly with the banking industry, consumer groups and academics as it worked to formulate its plan. The plan appears much more comprehensive than the voluntary measures attempted by the Bush administration, though the Obama administration would also count on the industry to mobilize behind these initiatives. One major difference is the bankruptcy court provision, which could be seen as a penalty for banks that don't go along with the government's plan.

Some consumer groups had pushed for the government to directly buy mortgages from banks and rework them that way. It's unclear if that was in the final effort, though Fannie Mae and Freddie Mac could be playing a similar role. 

By Damian Paletta, The Wall Street Journal