MESA, Arizona (Reuters) - U.S. President Barack Obama pledged up to $275 billion on Wednesday to help stem a wave of home foreclosures, part of a broad effort using massive sums of government money to push the country out of recession.
Up to 9 million families would be given the chance to refinance their mortgages under the plan, administration officials said. He unveiled the plan in Arizona, a state hard hit by home foreclosures.
Obama, who a day earlier signed into law a landmark $787 billion economic stimulus package, said his housing plan would counter a cycle of mortgage defaults, plummeting home values and financial-market turmoil.
“A lost home often begins with a lost job. Many businesses have laid off workers for a lack of revenue and available capital. Credit has become scarce as the markets have been overwhelmed by the collapse of securities backed by failing mortgages,” Obama said in a speech at a high school in Mesa.
“In the end, the home mortgage crisis, the financial crisis, and this broader economic crisis are interconnected,” he added.
The plan goes much further than previous government efforts to address the foreclosure crisis. In a break from past programs, it would help borrowers who have not yet missed a monthly mortgage payment but are straining to keep up.
Still, financial markets reacted skeptically to the plan.
U.S. stock prices dipped after government data showed a drop in housing starts and permits to record lows, portending more weakness in the housing market despite Obama’s plan.
The U.S. Federal Reserve cut its 2009 economic forecast sharply, saying the economy was likely to shrink by between 0.5 percent and 1.3 percent this year, weighed down by rising unemployment, frozen credit and the housing crisis.
The home foreclosure plan features a $75 billion fund made up of $50 billion from the $700 billion financial bailout fund approved last year and up to $25 billion from housing finance firms Fannie Mae and Freddie Mac.
It also draws on up to $200 billion authorized by last year’s housing bill.
“All of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to continue to deepen,” Obama said.
The plan will enlist Fannie Mae and Freddie Mac to do much of the heavy lifting.
Up to 5 million homeowners still making payments who cannot qualify for conventional refinancing because their home values have dropped could refinance through Fannie and Freddie.
Separately, up to 4 million “at risk” borrowers in danger of foreclosure could get payments reduced through modifications jointly paid for by lenders and the Treasury.
Those reductions would aim to bring borrowers payments down to 31 percent of their income.
A main challenge for the government has been prodding lenders to bring down borrowers’ payments to the point where they are affordable.
The plan would provide a $1,000 fee to mortgage servicers for each successful loan modification, while borrowers would receive up to $1,000 to reduce their loan principal each year if they stay current on their payments.
Obama also renewed a call for legislation that would allow bankruptcy judges to rewrite mortgage terms.
The housing crisis has played a central role in the financial and credit turmoil that spread across the globe, with many U.S. homeowners saddled with mortgages they cannot pay.
“I’m glad we’re finally acknowledging the obvious, and it’s just a matter of time now before hopefully something gets done,” said Sean Klasen, a 31-year old former mortgage broker from Mesa, Arizona where Obama announced his plan.
The housing package was meant to be a more politically popular aspect of Obama’s plans to rescue the economy. His administration’s plan to shore up the financial industry was met with a dive in stock prices last week.
“This plan is good, but it is unnecessarily complicated,” said Michael Cheah, senior portfolio manager at AIG SunAmerica Asset Management in New Jersey.
“Every effort helps, but the question is effectiveness. I think it could come with side effects, like people trying to game the system.”
Andrew Bekoff, chief investment officer at LPB Capital LLC in Pennsylvania said the measures could make a difference.
“The plan has a real shot to help. The combination of government action and additional funding (through) Fannie and Freddie should help keep millions of Americans in their homes.”
Obama, a Democrat who succeeded Republican George W. Bush on January 20, battled with opposition Republicans in Congress to pass the stimulus plan, his first major political victory in office.
Leaders of both parties have called for measures to address the housing crisis.
At the end of last year, just over 9 percent of all home loans in the United States were in arrears or already in foreclosure, the Mortgage Bankers Association has said.
A total of 8.1 million U.S. homes, or 16 percent of all households with mortgages, could fall into foreclosure by 2012, according to a report by Credit Suisse.
additional reporting by Tim Gaynor, Chris Sanders, Patrick Rucker, Al Yoon; Editing by David Storey and Frances Kerry