A day after completing the $787-billion stimulus package, US president Barack Obama on Wednesday outlined a $75-billion housing foreclosure mitigation plan, which may help about nine million  homeowners modify their mortgages. The programme takes effect on 4 March.

The salient features of the plan are to allow 4-5 million home owners to refinance their loans through government institutions Fannie Mae and Freddie Mac. This initiative is intended to help homeowners who have seen their mortgage payments rise to about 50-per cent of their monthly income due to the current recession. It also calls for a uniform loan restructuring rule to modify their mortgages to lower monthly interest rates through any participating lender.

The plan allows homeowners who are current on their payments to refinance their mortgage to a lower rate but cannot as they do not have the 20 per cent equity now required due to significant slump in valuation.

To help fund the programme, the US treasury is hiking an existing funding commitment to Fannie Mae and Freddie Mac. It will buy $200 billion of Fannie and Freddie preferred stock, up from its previously preferred stock purchase agreement of $100 billion. It also will allow Fannie Mae and Freddie Mac to buy $900 billion mortgage backed securities.

Although Obama said the plan ''would not save every home,'' a White House release says the measure would help ''up to 7 to 9 million families refinance or restructure their mortgages to avoid foreclosure.''

"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in subprime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments," Obama said.

"In the end, 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 continue to deepen - a crisis which is unraveling homeownership, the middle class, and the American Dream itself," Obama added.

The plan was announced by Obama and housing and urban development secretary Shaun Donovan in Mesa, Arizona, a suburb of Phoenix that has been reeling from the housing-industry meltdown and economic slowdown. In Mesa more than 300 families lost their homes to foreclosure in January.

Fannie and Freddie own or guarantee more than 30 million mortgages, or almost 60 per cent of all single-family loans, according to recent estimates.

Government subsidies for lenders
Under the $75-billion modification programme involving government subsidies to lenders, the lenders will be responsible for bringing down interest rates so that a borrower's monthly mortgage payment is no more than 38 per cent of pretax income. After that, the government programme would match the amount reduced by the lender to bring a homeowner's payments down to 31 per cent of pretax income.

As an incentive, the servicers will receive $1,000 for each successful modification, as well as additional government funding for each month the borrower stays current on its loan. Homeowners can also receive $1,000 a year for five years as part of the programme, as long as they stay current on their loan payments.

Henry Sommer, director at the National Association of Consumer Bankruptcy Attorneys, said he believes the incentives should encourage servicers to participate in the plan.

The plan also requires quarterly meetings to monitor the programme among the Federal Deposit Insurance Corp., Housing and Urban Development Department and the Federal Reserve.

Analysts say the plan will prevent millions of foreclosures as it uses market incentives and does not protect the system's worst abusers.

Because of the economic downswing homeowners are now paying about 50 per cent of their incomes on housing. They still are current on their payments, barely. For these homeowners, the government would help subsidise a lower interest rate that would bring their monthly payment down to affordable levels. The lender would pay half the cost of the lower rate, and the government would pay the other half.

Currently, homeowners who owe more than 80 per cent of the value of their homes have a tough time refinancing; nearly one in seven homeowners is "underwater" on their loan, about 12 million homeowners, nearly double the 6.6 million who were underwater at the end of 2007, according to Moody's.

The US dollar soared to a  6-week high against the Japanese yen after Obama announced the programme. With trouble brewing in Europe, the new programmes announced by the Obama Administration should keep the US dollar attractive to investors over the medium term. 

Earlier on Wednesday, the Commerce Department said housing starts and completions were down sharply in January, as were permits for new building.

US housing starts dropped to record lows in January by 16.8 per cent to an annual rate of 466,000 units, data showed; meanwhile, new building permits, which give a sense of future home construction, dropped 4.8 per cent to a 521,000 unit pace, also an all-time low.