Obama's $75 billion mortgage relief plan inspires hope, skepticism

Announcing the plan in Arizona – a state especially hard hit by the housing crunch – Obama said that turning around the battered economy requires stemming the continuing tide of foreclosures. The housing crisis that began last year set many other factors in motion and helped lead to the current, widening recession.

"In the end, all of us are paying a price for this home mortgage crisis," Obama said at a high school near Phoenix, "and all of us will pay an even steeper price if we allow this crisis to deepen."

Talking in broad strokes about the importance of the issue to the economy as a whole, the president took care not to miss the pain that the housing problems have caused in individual families.

"The American Dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods," he said. "While this crisis is vast, it begins just one house and one family at a time."

Angela Ward of Raleigh said she almost was one of those statistics.

"I was the victim of predatory lending," Ward said. "They tried to foreclose on the home. I had money from a 401(k), friends (and) family and was able to settle before it went to court."

In the type of effort Obama hopes to duplicate with his plan, she avoided foreclosure and was able to work with her bank to reduce her monthly payments.

Headlining Obama's plan is a Homeowner Stability Initiative, which would provide a set of incentives to mortgage lenders in an effort to convince them to help up to 4 million borrowers on the verge of foreclosure. The goal is to cut monthly mortgage payments to sustainable levels, defined as no more than 31 percent of a homeowner's income.

Funding would come from the $700 billion financial industry bailout passed by Congress last fall.

Another key component would specifically help those said to be "under water" – with dwellings whose market values have sunk below the principal still owed on the mortgages. Such mortgages have traditionally been almost impossible to refinance, but the White House said its program will help 4 million to 5 million families do just that if their mortgages are owned or guaranteed by Fannie Mae or Freddie Mac.

Of the nearly 52 million U.S. homeowners with a mortgage, about 13.8 million, or nearly 27 percent, owe more on their mortgage than their house is now worth, according to Moody's Economy.com.

"We must stem the spread of foreclosures and falling home values for all Americans," Obama said.

Ken Bell, president of Aspera Financial LLC, an investment management and financial planning firm in Cary, said the plan could help slow the housing skid, but he warned the root of the problem remains too many homes for sale and not enough buyers.

"I don't think this will be the end of it," Bell said. "The problem is Americans are used to a quick fix. We're not a very patient country. This is going to take some time. The market is working out these problems – it's clearing out the excess – but it's going to take some time."

Foreclosures rose 81 percent nationwide last year. Nevada took the biggest hit, with 7 percent of homeowners receiving a foreclosure filing, while North Carolina ranked 27th in the U.S. with a foreclosure rate of less than 1 percent.

Housing Secretary Shaun Donovan stressed that homeowners don't need to be delinquent in order to get help under Obama's plan.

"This is necessary policy. It's smart economics, and it's just and fair," Treasury Secretary Timothy Geithner told reporters.

Asked why the cost had jumped to $75 billion from initial talk of a $50 billion effort, Geithner said, "We think that's necessary to make a program like this work."

Relief would be almost instantaneous, basically as soon as rules are published March 4, he said. "You'll start to see the effects quite quickly," he said.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said previous efforts had largely flopped. "We've not attacked the problem at the core," she told reporters. "We are woefully behind the curve."

The biggest players in the mortgage industry already had halted foreclosures pending Obama's announcement.

"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly," Obama said. "It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans."

He issued a warning as well: "All of us must learn to live within our means again."

The plan will not help those who took risky bets by buying homes to sell them – not live in them – or dishonest lenders who distorted facts for naive buyers, or buyers who signed on for loans they knew they could not afford, he said.

"This plan will not save every home," Obama said.

Still, Ward, the Raleigh homeowner, said the plan is a big step in the right direction.

"It could be some hope for those that are a step away from having their houses as pictures on the (courthouse) wall," she said, pointing to rows of foreclosure notices.

In tandem with the foreclosure plan, the Treasury Department announced it would double the size of its lifeline to Fannie Mae and Freddie Mac, seeking to bolster confidence in the mortgage giants effectively taken over by the government last fall. The government said it would absorb up to $200 billion in losses at each company, by using money Congress set aside last year, and will continue purchasing mortgage-backed securities from them.

The Treasury said the increased support for Fannie Mae and Freddie Mac didn't reflect projected losses at the two companies. The two companies are currently projected to need a combined government subsidy of about $66 billion, well short of the new promise of up to $400 billion.

Asked about the doubling of the guarantees for Fannie and Freddie, Geithner said: "This is not a judgment about the expected losses ahead. It underscores commitment, and that is very important to help keep mortgage rates low." Geithner said that most, but not all, of the money would come the financial bailout fund.

The president's announcement came a day after he signed into law a $787 billion economic stimulus plan he hopes will spark an economic turnaround and create or save 3.5 million jobs.

At the same time, the administration was grappling with the darkening prospects for the U.S. auto industry.

Detroit carmakers submitted restructuring plans to qualify for continued government loans, but General Motors Corp. and Chrysler LLC asked for another $14 billion in bailout cash.