Are you a “responsible homeowner?”

If so, President Obama has a gift for you.

In a wholesale attempt to crush the housing bust in its tracks, Obama revealed his $75 billion Homeowner Affordability & Stability Plan to allow 4-5 million so-called “responsible homeowners” to refinance their homes with lower interest rates and help a further 3-4 million lower their monthly mortgage payments.

It’s all designed to help fend off the dreaded specter of foreclosure, which engulfed two million Americans in 2008 – with the plan symbolically announced in Arizona, home to one of the highest home foreclosure rates in the nation.

It’s also well-timed in terms of beefing up support for the plan, amid more gloomy housing market figures from the Commerce Department today…

Housing Market Takes A Tea Break As Builders Down Tools

With housing demand in the dumps and prices still heading south, 2009 got off to a dubious start with the news that the pace of new home construction slumped to its lowest level since 1959.

Notwithstanding the effect that colder weather has on homebuilding, the figures were poor across the entire country still showed huge drop of almost 17% from December to an annual rate of 466,000 and was 12% lower than economists expected. To put that in perspective, homebuilders broke ground on 906,200 new properties in 2008 – and that was a record low. It means that over the past three months of double-digit declines, housing starts have sunk at an 86% annual rate over that period.

Not only that, building permit applications also slid by 4.8% to a record low of 521,000 units.

While the headline figures make for grim reading, it’s worth remembering that with the economy in recession, you wouldn’t expect them to be rising, or even flat. With demand tanking and prices falling, homebuilders have “downed tools” and are more focused on shifting excess existing inventory.

And while Obama may not be able to ride to the rescue on the construction and permits situation right away, his plan today does intend to help Americans already crippled by the real estate mess.

And it will need to, if these figures from Credit Suisse are anything close to accurate…

“Unraveling Homeownership, The Middle Class… And The American Dream Itself”

The two million Americans who faced foreclosure proceedings in 2008 will seem like small potatoes if the Credit Suisse report, released last month, holds true.

It said the number could rise to as many as 10 million over the next few years, depending on the severity of the recession.

And even though the president puts the figure at closer to six million, it’s no wonder that Team Obama is swinging into action.

Calling it a “crisis which is unraveling homeownership, the middle class, and the American Dream itself,” Obama’s bold plan would see the government subsidize his efforts (hey, remember to leave a few more billion for the auto industry, guys).

It’s then hoped that by allowing certain homeowners to refinance and reducing monthly payments, it will help stabilize the market. In return, homeowners would give up a little of their home’s equity by way of repayment.

In short…

• Borrowers who owe more than 80% of their home’s value would be eligible to refinance and lower their monthly payments.
• Through subsidizing interest rates, at-risk borrowers could reduce their monthly payments to no more than 31% of their income. This proposal has drawn understandable criticism from sensible, solvent borrowers, who rightly ask why they don’t get a break for managing their money properly.
• The proposal expands previous rescue efforts by placing emphasis not only on those who have already defaulted on their payments, but also those who are at risk of doing so while still up-to-date. Mortgage servicers will be offered $1,000 incentives to modify agreements of defaulters and those at risk, and any institution that accepts federal funds will be required to abide by a loan modification system.
• The plan will double the financial aid for America’s two big mortgage lenders – Fannie Mae and Freddie Mac, who have suffered hugely at the hands of the housing bust themselves – so they can increase the number of mortgages they offer. A restriction that doesn’t allow the two to guarantee refinancing on mortgages worth more than 80% of a home’s value will be removed under Obama’s plan and the government’s guarantee against their mortgage losses will swell to $400 billion.

The goal of this aggressive plan is simple: To arrest the housing market’s deep slump by attacking the foreclosure rate. Or in Obama’s words, allowing “millions of families stuck with loans at a higher rate to refinance” and “give millions of families resigned to financial ruin a chance to rebuild.”

Time will tell whether it ends up being the housing market’s version of “Little House On The Prairie” or “The Money Pit.”

Best regards,

Martin Denholm
Smart Profits Report