New Mortgage Plan Expected to Help 9 Million Avoid Foreclosure

President Obama has promised another $275 billion to help homeowners maintain their mortgages and avoid foreclosure. The new mortgage plan will provide $75 billion for direction foreclosure prevention and double the federal guarantee of Fannie Mae and Freddie Mac--adding another $200 billion--to a total of $400 billion.

The latest is mortgage rescue plans, deemed the Homeowner Affordability and Stability Plan, relies on a combination of taxpayer funds and voluntary lender agreements to lower the payments of struggling or "underwater" borrowers. The majority of execution of this plan again lies within the mortgage portfolios of Fannie and Freddie--two recently giant seized mortgage giants, holding 40 percent of the nation's $12 trillion in outstanding mortgage debt.

Although the details of the plan are still vague President Obama attempted to summarize the objective with this statement: "The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly. It will not rescue the unscrupulous or irresponsible."

Initial indications seem to indicate that the plan will manage that by avoiding mortgages that exceed Fannie and Freddie loan limits, people already in default, and speculators (defined as those with multiple properties). It appears that the Homeowner Affordability and Stability Plan will work in one of two ways:

* Allowing homeowners whose home equity has dropped below the traditionally qualifying 80 percent loan-to-value ratio to refinance at a lower rate, or * assisting homeowners with income loss and potential home equity depreciation to have their mortgage payments lowered to 31 percent of their current income for up to 5 years while they find work

In addition to the Fannie and Freddie government assistance lenders and borrowers are being given incentives to participate and stay current on payments, respectively. Each will be paid up to $1000 a year--servicers for modifying the loans and borrowers for staying current on their payments. The federal government will also split the cost of reducing debt-to-income ratios to 31 percent, by modifying payments.

These incentives directly address challenges and criticisms that current loan modification programs have been fighting over the last year.

Of course, like most bailout plans there are concerns and pundits. Like many critics of late there is criticism that the plan may be insufficient to really cap the growing problem. The most pragmatic contend that there is little you can do to change the fundamental economic tenets of a housing bubble deflating and an economy that has stalled at the same time.

The source of funding for this new program is already in place, drawing from the $700 billion TARP fund, requiring little more than President Obama's endorsement to implement.