Obama throws lifeline to homeowners

Obama throws lifeline to homeowners

STEVE LADURANTAYE

The Associated Press

Published Monday, Oct. 24, 2011 10:12AM EDT

Last updated Monday, Oct. 24, 2011 7:25PM EDT

Barack Obama, faced with 14 million unemployed workers and a jobless rate that won’t budge, is tackling the U.S. economic crisis by focusing on where it began: the housing market.

The White House threw a lifeline on Monday to millions of frustrated middle-class homeowners who are struggling to pay their mortgages and who now owe more than their homes are worth. A new government program will allow them to refinance their loans at lower rates with less difficulty than before, putting more money in their pockets in the hope that they will spend it and give the economy a much-needed boost.

The move comes at a time when many economists are seizing on the U.S. housing bust as a major reason the world’s largest economy is recovering so slowly from a recession that ended more than two years ago, and why the labour market has been so slow to heal from that event. More than six million people in the U.S. have been unemployed for longer than six months.

Interest rates have plunged in recent months, thanks to a poor economic outlook and relatively low inflation. But millions of Americans with relatively clean credit histories are stuck paying higher interest rates than currently available because their mortgages were struck prior to the housing correction. They are unable to take advantage of lower rates because a drop in real estate values has left them owing more on the house than its appraised value, meaning few banks want to issue a new loan.

That has left them paying hundreds of dollars more a month in payments than necessary, and has forced tens of thousands of homeowners to sell their homes at a loss when their mortgages come due because they can’t strike a deal with a lender on a new mortgage.

The White House’s plan makes it easier for them to both stay in their houses and have more disposable income. “However many homeowners are going to be helped by this, they will be very grateful for the assistance that will allow them to refinance at today’s low rates,” White House spokesman Jay Carney said Monday.

Among the key changes: Homeowners who refinance will no longer need to have the property appraised before getting the new rate. This is important because under an earlier government plan, a homeownercould see the perceived value of his home drop by hundreds of thousands of dollars simply because of nearby foreclosures that saw neighbouring properties sell at massive discounts.

The White House said changes to the Home Affordable Refinance Program will make it easier for homeowners to stay in their homes by ensuring that creditworthy owners can get loans without being penalized for declining property values. The new rules apply to homeowners with federally-guaranteed mortgages who are current on their payments.

“There aren’t too many people who could come up with the difference” between what their mortgage balances and the appraised value of their homes, said Rhonda Porter, a mortgage originator in King City, Wash., who helps families refinance loans. “That really does change everything because people don’t need to take a loss because of something that happened next door.”

Karl E. Case, a professor of economics at Wellesley College, said in a recent paper that the decline in house prices from 2005 to 2009 lowered consumer spending by some $240-billion – equal to about 1.7 per cent of all of the country’s economic activity.

The plan relaxes eligibility standards, and presents refinancing as a possibility for those who are 25 per cent or more “underwater” - that is, whose mortgages are at least 25 per cent larger than the value of their homes. To qualify, a homeowner must have taken the mortgage before June, 2009. The loans also must be owned or backed by government-controlled mortgage buyers Fannie Mae and Freddie Mac.

The program doesn’t help anyone who is behind on his payments – all applicants must be up-to-date on their loan.

The initial program, which was launched in 2009, targeted four million Americans. But by August, only 894,000 homeowners had refinanced at lower rates because of all of the conditions attached to the assistance. The White House said there was no way to know how many homeowners may try to refinance under the modified plan.