The Nitty Gritty of Obama’s Mortgage Rescue Plan

The Obama administration will publish rules governing its $75 billion mortgage rescue plan on March 4, the same day that most parts of the plan will take effect.

Only a few parts of the plan—such as the call to allow bankruptcy judges to modify mortgages—require Congress to act, the New York Times reports. The Times, the Wall Street Journal and the Washington Post explain that incentives are a key part of the plan. Here are details:

• Fannie Mae and Freddie Mac will get an additional $200 billion in financial backing. Rules would be eased so that homeowners with loans owned or guaranteed by the two mortgage lenders may refinance even if they don’t have 20 percent equity in their home. Homeowners will now be allowed to refinance if the mortgage does not exceed 105 percent of their property value.

• Loan modifications will be subsidized with $75 billion in government Troubled Asset Relief Program funds. Lenders that agree to lower payments to 38 percent of a borrower’s monthly income would get incentives, including an up-front payment of up to $1,000 for every modification and additional success fees of up to $1,000 each year for three years if the borrower does not default. Borrowers who stay current on their modified loans would get their principal reduced by $1,000 a year for five years.

• After the lender lowers payments to 38 percent of income, the government would match additional reductions that bring the payment to as low as 31 percent of income. The lower payments could be accomplished by a longer repayment period, reduced interest rates or reduced principal, according to the Times.