Healing the housing market

After watching the State of the Union speech last week I wrote a blog post about the President's remarks on the need to allow more homeowners to refinance.  Since then, I've been curious to learn details of the plan.  Yesterday, the White House issued a fact sheet titled "President Obama's Plan to Help Responsible Homeowners and Heal the Housing Market."  The plan is certainly comprehensive and seems to offer some good ideas, but I was especially interested in how it deals with homeowners who are underwater on their current mortgages.

Upon reading the fact sheet, it is clear that a portion of the proposal deals with underwater homeowners.  Here's the example it uses to illustrate the proposal:

• A borrower has a non-GSE mortgage originated in 2005 with a 6 percent rate and an initial balance of $300,000 – resulting in monthly payments of about $1,800.
•  The outstanding balance is now about $272,000 and the borrower’s home is now worth $225,000, leaving the borrower underwater (with a loan-to-value ratio of about 120%).
• Though the borrower has been paying his mortgage on time, he cannot refinance at today’s historically low rates.
• Under the President’s legislative plan, the borrower would be eligible to refinance into a 4.25% percent 30-year loan, which would reduce monthly payments by about $460 a month.

There are many other aspects to this proposal but what is described here would certainly be a big help.  That extra $460 per month would undoubtedly be spent on other things and would thereby stimulate the economy while increasing the chances that the homeowner could ride out this fiscal storm.  Of course, this part of the proposal requires Congressional action, so given the state of things on Capitol Hill, it might not advance much beyond the Fact Sheet stage for a while.