Obama Releases Details of New Housing Plan

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The initiative, first announced on Feb. 18, would require applicants for loan modifications to fully document their incomewith pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” according to documentsreleased by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.

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A mortgage lender or mortgage-servicing company would first receive cash incentives to modify a borrowers’ loan so that the monthly housing payment declines to no more than 38 percent of the family’s gross monthly income. At that point, the government would match, dollar for dollar, the lender’s cost in reducing the payments as low as 31 percent of monthly income.

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The reduced payments could come in the form of a lower interest rate, longer mortgage term or a reduction in the principal outstanding loan amount. The lender would have to make a calculation on whether its cost from reducing the monthly payments, after accounting for the government’s cost-sharing, would be less than the costs it would incur from foreclosing on the house.

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The guidelines indicate that a lender would have to make the loan concessions if the subsidized cost of doing so would be lower than the cost of foreclosure. The decision would become voluntary if the estimated costs of the concessions appeared to be higher than the cost of foreclosure.