Will Obama's Housing Plan Work?


On Wednesday the White House unveiled its new plan to help homeowners on the brink. We’ve got the details – now will it work?

"All of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen," Obama said.

The plan is fairly complex but following are the main elements.

- a $75 billion fund would subsidize homeowners struggling to pay their mortgages.

- housing finance companies Fannie Mae and Freddie Mac may invest a further $100 billion in mortgages to mop up more home loans and spur fresh lending.

- Washington may inject a further $100 billion into each of the mortgage giants, protecting them against losses as they expand their massive reach into the housing market.

Bloomberg is reporting that some banks, including Citigroup , JPMorgan Chase , PNC Financial Services and Bank of America have agreed, at the request of lawmakers, to suspend foreclosure proceedings until the Obama plan is adopted.

Despite the sweeping actions, financial markets greeted the plan with skepticism. Stocks were mixed to modestly negative immediately following the announcement.

"This plan is good, but it is unnecessarily complicated," says Michael Cheah, senior portfolio manager at AIG SunAmerica Asset Management. "Every effort helps, but the question is effectiveness. I think it could come with side effects, like people trying to game the system."

Barry Ritholtz CEO Of Fusion IQ isn’t a fan. He tells Fast Money, “don’t kid yourself.” He doesn’t think the plan stabilizes anything. “Nothing is going to stop the market from taking housing prices to where they want to go.” And he feels that’s another 15% lower.

If we believe that home prices are going somewhat lower than where they are now – is there a trade?

For the average viewer there is not, replies Ritzholz.

I think you can look at the homebuilders, counters Tim Seymour. Inventories are coming down and that should bode well for those with solid balance sheets.

* In case you’re interested below you’ll find more specifics on the Obama plan


* Enable refinancing for 4 million to 5 million "responsible" homeowners who took out conforming 30-year fixed mortgages with an 80 percent or lower loan-to-value ratio and are current on payments.

* The decline in home values means many of these families cannot qualify for conventional refinancing because their loan-to-value ratio would exceed 80 percent.

* The program would allow mortgages owned or guaranteed by Fannie Mae and Freddie Mac to be refinanced, reducing monthly payments.


* Initiative intended to reach 3 million to 4 million "at risk" homeowners who are struggling to afford their mortgage payments.

* Program targets owners with high mortgage debt compared to income or those with "underwater" mortgages that exceed the value of their homes. Delinquency on a loan is not a requirement for eligibility and the aid is aimed solely at owner-occupants willing to stay in their homes.

* Borrowers with high total debt obligations exceeding 55 percent of their income must enter consumer debt counseling to help reduce car, credit card and other debt to receive mortgage modifications.

* The U.S. Treasury will share the cost of reducing mortgage payments with mortgage lenders and servicers. Lenders must agree to reduce interest rates so monthly payments are no more than 38 percent of a borrower's income. The Treasury will match those reductions dollar-for-dollar to bring down payments to 31 percent of income.

* Lenders must agree to keep the modified payments in place for five years.

* The Obama administration will seek "careful" changes to bankruptcy law to allow judges to rewrite mortgage terms on loans originated in the past few years. This will apply only to existing mortgages under the GSE conforming loan limits "so that millionaire homes don't clog the bankruptcy courts."

* Mortgage servicers will receive incentives, including a $1,000 fee for each successful modification under the program, and up to $3,000 over three years if the borrower stays current. Mortgage holders also will receive $1,500 and servicers will receive $500 if the modifications are made before a borrower defaults.

* Borrowers will receive up to $1,000 in principal reductions each year if they stay current on the modified loan.

* Treasury and FDIC will create a $10 billion insurance fund to protect lenders against home value declines as a means to discourage foreclosures based on anticipation of falling home values.


* The Treasury will double its funding commitments to Fannie Mae and Freddie Mac to $200 billion each under a preferred stock purchase mechanism launched last year.

* The increased backstop does not anticipate increased equity draws or a change in financial position, but is aimed at providing stronger investor confidence in the two institutions, helping to lower their funding costs and hence, mortgage rates.

* Fannie's and Freddie's retained mortgage portfolios will be allowed to increase under the agreements by $50 billion each to $900 billion each. This will be accompanied by corresponding increases in allowable outstanding debt.

* Obama administration also will work with Fannie and Freddie to support state housing finance agencies to help homebuyers.

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Trader disclosure: On Feb. 18th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (BAC), (EEM), (EEM), (PBR), (XOM), (FXI); Seymour's Firm Owns (VIP); Terranova Owns (FCX), (XBI), (AMGN), (KCE), (DIS); Terranova Owns (IBM) & (IBM) Call Spread; Terranova Owns (AMGN) Puts; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Najarian Owns (CHK) Put Spread, Najarian Owns (CBS) Calls, Najarian Owns (EEM) Call Spread, Najarian Owns (FCX) & (FCX) Calls, Najarian Owns (GS) Calls, Najarian Owns (GDX) Call Spread, Najarian Owns (GLD) Call Spread, Najarian Owns (HPQ) Spread, Najarian Owns (MSFT) & (MSFT) Short Calls, Najarian Owns (MS) & (MS) Short Calls, Najarian Owns (MOS) Call Spread, Najarian Owns (STI) Call Spread, Najarian Owns (WFC) & (WFC) Calls

CNBC.com with Reuters