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Obama Plan for Housing Flawed, Critics Say

Stocks in this article: FNM FRE JPM

Updated from Wednesday, Feb. 18

Critics across the housing and banking industries say the Obama administration's plan to spend up to $275 billion to aid homeowners at risk of foreclosure may be more difficult than imagined and help fewer homeowners than it sets out to assist.

The multi-faceted Obama plan outlined on Wednesday, called the Homeowner Affordability and Stability Plan, is intended to modify as many as nine million existing mortgages that homeowners cannot afford, or whose value exceeds that of the home.

One component of the plan will spend $75 billion to reduce monthly mortgage payments for 3 million to 4 million "responsible," but at-risk homeowners by matching lender reductions dollar-for-dollar. It will also provide other incentives to keep loans current and to rework mortgages instead of foreclosing.

A second component will allow 4 million to 5 million homeowners who are not yet at risk of foreclosure refinance into lower mortgage rates. Those homeowners must have conforming loans owned or guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE).

The third component will provide up to $200 billion to shore up Fannie Mae (FNM) and Freddie Mac (FRE) through purchases of preferred stock and mortgage-backed securities. The intent is to boost confidence in housing finance agencies that own or guarantee half of the country's mortgage debt, and to provide additional liquidity in the mortgage market.

The plan intends to help residents who were deceived into entering risky agreements, or those who live in areas where prices have dropped so precipitously that the mortgage principal is worth more than the home. At a high school in Arizona, a state especially battered by the housing crisis, Obama said that speculators, subprime borrowers who knowingly took out outsized loans they couldn't pay off, and dishonest lenders need not apply.

Will the Obama administration's plan to help homeowners actually work?

Yes. We've needed this all along.
It will help, but more aid would be better.
No. This is another disappointment from Washington.

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