Homeowner Stability Initiative to Stop Foreclosures

On February 18, 2009, President Barack Obama announced a $75 billion plan to help stop foreclosures. The Homeowner Stability Initiative (HSI) will help between 7-9 million homeowners avoid foreclosure by restructuring or refinancing their mortgage. The plan has three components.

Enable 4-5 Million Homeowners to Refinance

This component helps homeowners who are "upside down" in their mortgage. Housing prices have fallen 25% since 2005, so people who bought homes then have found their mortgage is worth more than the value of the home. Usually, banks won't allow homeowners to refinance if the amount they owe on the mortgage is greater than 80% of the value of the home.

The HSI allows people whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae to refinance at today's lower interest rates, reducing monthly payments.

Provide Loan Modifications

This component would reduce monthly payments to 31% of the homeowner's income. The lower interest rate will stay in effect for five years. The Treasury Department will pay $1,000 towards reducing the principal on the loan for each year (up to five years) that borrowers stay current on their payments.

Banks will receive incentives for participating. First, the government will subsidize any bank losses sustained in modifying the loan. Second, mortgage holders will receive $1,500 and servicers $500 to modify loans before the holder falls behind. Servicers will also receive $1,000 for every successful loan mod, and receive an additional $1,000 for the next three years the loan remains in place. This portion of the plan will be paid for from TARP funds

In addition, the government will create a $1.5 billion fund to help renters who are forced to relocate due to foreclosed homes. A $2 billion Neighborhood Stabilization Fund will be created to help neighborhoods that become distressed as a result of foreclosed homes.

Increase Funding to Fannie Mae and Freddie Mac

The Treasury Department will purchase an additional $200 billion of preferred shares in Fannie Mae and Freddie Mac. This will allow the two agencies to purchase and guarantee more mortgages - up to $900 billion. This portion of the plan will be paid for from existing Housing Recovery Act funds.(Source: Treasury Department,"Homeowner Affordability and Stability Plan," February 18, 2009)