“Today, as a result of declining home values, millions of families are “underwater,” which means they owe more on their mortgages than their homes are worth. These families are unable to sell their homes, and unable to refinance them. So in the event of a job loss or another emergency, their options are limited.
“Right now, Fannie Mae and Freddie Mac — the institutions that guarantee home loans for millions of middle-class families — are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater — or close to being underwater — cannot turn to these lending institutions for help.
“My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee. This will allow millions of families stuck with loans at a higher rate to refinance. 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.
“I also want to point out that millions of other households could benefit from historically low interest rates if they refinance, though many don’t know that this opportunity is available to them — an opportunity that could save families hundreds of dollars each month. And the efforts we are taking to stabilize mortgage markets will help these borrowers to secure more affordable terms, too.
“Second, we will create new incentives so that lenders work with borrowers to modify the terms of sub-prime loans at risk of default and foreclosure.
Sub-prime loans — loans with high rates and complex terms that often conceal their costs — make up only 12 percent of all mortgages, but account for roughly half of all foreclosures.
Right now, when families with these mortgages seek to modify a loan to avoid this fate, they often find themselves navigating a maze of rules and regulations but rarely finding answers. Some sub-prime lenders are willing to renegotiate; many aren’t. Your ability to restructure your loan depends on where you live, the company that owns or manages your loan, or even the agent who happens to answer the phone on the day you call.
“My plan establishes clear guidelines for the entire mortgage industry that will encourage lenders to modify mortgages on primary residences. Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines — which will be in place two weeks from today.
“If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, we’ll make up part of the gap between what the old payments were and what the new payments will be. And under this plan, lenders who participate will be required to reduce those payments to no more than 31 percent of a borrower’s income. This will enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.
“So this part of the plan will require both buyers and lenders to step up and do their part. Lenders will need to lower interest rates and share in the costs of reduced monthly payments in order to prevent another wave of foreclosures. Borrowers will be required to make payments on time in return for this opportunity to reduce those payments.
“I also want to be clear that there will be a cost associated with this plan. But by making these investments in foreclosure-prevention today, we will save ourselves the costs of foreclosure tomorrow — costs borne not just by families with troubled loans, but by their neighbors and communities and by our economy as a whole. Given the magnitude of these costs, it is a price well worth paying.
“Third, we will take major steps to keep mortgage rates low for millions of middle-class families looking to secure new mortgages.
“Today, most new home loans are backed by Fannie Mae and Freddie Mac, which guarantee loans and set standards to keep mortgage rates low and to keep mortgage financing available and predictable for middle-class families. This function is profoundly important, especially now as we grapple with a crisis that would only worsen if we were to allow further disruptions in our mortgage markets.
“Therefore, using the funds already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities so that there is stability and liquidity in the marketplace. Through its existing authority Treasury will provide up to $200 billion in capital to ensure that Fannie Mae and Freddie Mac can continue to stabilize markets and hold mortgage rates down.
“We’re also going to work with Fannie and Freddie on other strategies to bolster the mortgage markets, like working with state housing finance agencies to increase their liquidity. And as we seek to ensure that these institutions continue to perform what is a vital function on behalf of middle-class families, we also need to maintain transparency and strong oversight so that they do so in responsible and effective ways.
“Fourth, we will pursue a wide range of reforms designed to help families stay in their homes and avoid foreclosure.
“My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value — as long as borrowers pay their debts under a court-ordered plan. That’s the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.
“In addition, as part of the recovery plan I signed into law yesterday, we are going to award $2 billion in competitive grants to communities that are bringing together stakeholders and testing new and innovative ways to prevent foreclosures. Communities have shown a lot of initiative, taking responsibility for this crisis when many others have not. Supporting these neighborhood efforts is exactly what we should be doing.
“Taken together, the provisions of this plan will help us end this crisis and preserve for millions of families their stake in the American Dream. But we must also acknowledge the limits of this plan.
“Our housing crisis was born of eroding home values, but also of the erosion of our common values. It was brought about by big banks that traded in risky mortgages in return for profits that were literally too good to be true; by lenders who knowingly took advantage of homebuyers; by homebuyers who knowingly borrowed too much from lenders; by speculators who gambled on rising prices; and by leaders in our nation’s capital who failed to act amidst a deepening crisis.
“So solving this crisis will require more than resources — it will require all of us to take responsibility. Government must take responsibility for setting rules of the road that are fair and fairly enforced. Banks and lenders must be held accountable for ending the practices that got us into this crisis in the first place. Individuals must take responsibility for their own actions. And all of us must learn to live within our means again.
“These are the values that have defined this nation. These are values that have given substance to our faith in the American Dream. And these are the values that we must restore now at this defining moment.
“It will not be easy. But if we move forward with purpose and resolve — with a deepened appreciation for how fundamental the American Dream is and how fragile it can be when we fail in our collective responsibilities — then I am confident we will overcome this crisis and once again secure that dream for ourselves and for generations to come.
“Thank you, God bless you, and God bless America.