MESA, Ariz. — President Obama announced a plan on Wednesday to help as many as nine million American homeowners refinance their mortgages or avert foreclosure, saying that it would shore up housing prices, stabilize neighborhoods and slow a downward spiral that was “unraveling homeownership, the middle class and the American Dream itself.”
The plan, which was more ambitious and expensive than many housing analysts had expected, drew praise from consumer advocates as well as the financial industry.
It could ultimately cost taxpayers as much as $275 billion — $75 billion in direct spending to keep people in their homes and the rest in additional financial backing for the government-controlled mortgage giants, Fannie Mae and Freddie Mac.
But analysts and administration officials alike cautioned that it would not come close to halting the tidal wave of foreclosures. Nor would it provide much help to millions of homeowners who are “under water,” or holding mortgages that are bigger that the market value of their houses.
“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”
Almost one in 10 home mortgages is either delinquent or in foreclosure, and analysts estimate that at as many as six million families could lose their homes over the next three years in the absence of government action.
The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.
A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.
Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.
The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democratic leaders in Congress strongly support the idea and banking executives are putting up less resistance than before.
Republican lawmakers reacted cautiously to Mr. Obama’s plan. Representative John Boehner of Ohio, the House Republican leader, called it “an important step,” but raised questions.
“Does your plan compensate banks for the bad mortgages they should never have made in the first place?” Mr. Boehner asked. “Will individuals who misrepresented their income or assets on their original mortgage application be eligible to get taxpayer-funded assistance?”
Mr. Obama’s announcement came a day after he signed his $787 billion economic stimulus package, and administration officials said that the initiatives would work in tandem to stabilize the economy.
The plan will take effect March 4, when the administration publishes detailed rules explaining it.
Except for the provision that empowers bankruptcy judges, almost all the other elements can be enacted by Mr. Obama without further action by Congress.
To help the estimated four million homeowners in danger of foreclosure, Mr. Obama will create a $75 billion program to subsidize loan modifications that would reduce a family’s monthly payment to as little as 31 percent of its gross monthly income.
As envisioned, a mortgage lender would have to first make enough concessions to reduce a borrower’s payments to 38 percent of monthly income. To encourage lenders, the government would offer incentives, like a $1,000 upfront payment for every loan modified and more payments if the borrower stays current.
If the lender gets the monthly payments down to 38 percent of the borrower’s monthly income, the government would then match, dollar for dollar, additional reductions to bring the payment as low as 31 percent of monthly income.
The changes could be accomplished in several ways, from stretching out the repayment period of a loan to reducing the interest rate or reducing the outstanding principal.
But analysts noted that lenders, or the mortgage-servicing companies that administered the loan, would still have the last word on whether to make concessions. If a lender decides that the cost of the concessions is higher than the cost of foreclosing, even with the government subsidies, then a borrower would probably still lose the property.
A potentially big limitation on the rescue portion of Mr. Obama’s plan involves second mortgages. To avoid the need for a down payment, or to minimize the down payment, millions of people bought homes with piggy-back mortgages that went alongside the primary mortgages.
Administration officials said on Wednesday that their plan to help homeowners facing foreclosure did not deal with second mortgages. Because those second mortgages were often made by a different lender than the first mortgages, that could greatly complicate negotiations over a loan modification.
To help homeowners who can still keep up with their payments, but who may resent the idea of rescuing others, Mr. Obama’s plan would make it easier to refinance at today’s very low interest rates.
The plan would apply to people with fairly traditional loans that are owned or guaranteed by Fannie Mae and Freddie Mac — about 30 million homeowners. The new loans would not be subsidized, but borrowers would not need to have a 20 percent equity stake in the house.
Normally, Fannie Mae and Freddie Mac require that such borrowers pay private mortgage insurance, which can add hundreds of dollars to a monthly payment. Administration officials estimated that this portion of the plan could help 4 million to 5 million borrowers.
The big limitation of the refinancing portion of the plan is that it would not help borrowers who are current, but under water. It would only be available for mortgages that are not more than 5 percent above the current market value of the house. Mark Zandi, chief economist at Moody’s Economy.com, estimated that the plan would help only a million of the 14 million homeowners who are under water.
A third, more vague component of the plan is aimed at propping up the mortgage market as a whole by having Fannie Mae and Freddie Mac step up their purchases of mortgages and mortgage-backed securities.
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