Last week, in his State of the Union address, President Obama introduced a proposal to help millions of homeowners, who are underwater on their mortgages, refinance their loans at current low rates. Today, the administration released details of the plan.

The plan, which must be approved by Congress before it can become active, would expand access to federal refinancing initiatives for holders of mortgages that are not currently backed by Fannie Mae or Freddie Mac.

"No more red tape, no more runaround from the banks," the president said during the address, referring to the underwater mortgage assistance plan that his administration estimates could save qualified homeowners up to $3,000 a year by refinancing their loans.

The refinance initiative would be available to owners of single-family, owner-occupied homes who meet several basic "responsibility" criteria. The criteria include that qualified borrowers:

  • have been current on payments for the past six months and have not missed more than one payment in the previous six months;
  • have a FICO credit score of at least 580; and
  • have a loan not higher than Federal Housing Authority loan limits for the home’s geographic area.

"A small fee on the largest financial institutions will ensure that (the plan) won’t add to the deficit, and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust," said President Obama during the State of the Union address. The administration estimates the initiative could cost from $5 billion to $10 billion.

Other aspects of the plan include a proposed "Homeowner Bill of Rights," which would encourage streamlined, simplified mortgage forms and limit the practice of "dual-tracking," in which banks concurrently work on restructuring a loan and pursue a foreclosure for the same property at the same time.

"Before they can start foreclosure, banks will have to show they took all reasonable steps to modify a borrower’s mortgage," wrote Robert Freedman in a Realtor Magazine article published today.

Another key part of the plan is a pilot project to turn vacant and foreclosed-upon homes into rentals to revitalize neighborhoods with many empty, unused houses. The Obama administration and the Federal Housing Finance Agency are working together on a plan to convert real estate owned properties (REOs) into rentals.

Ethan Handelman, vice president for policy and advocacy for the National Housing Conference, which advocates for affordable housing, said in a statement, "We urge Congress to take up these proposals in a spirit of bipartisanship and the administration to move swiftly to implement the elements that it can do on its own."

And Bob Nielsen, chairman of the National Association of Home Builders trade group, also expressed support for the plan. "The nation’s home builders commend President Obama for highlighting the vital role that housing plays in the U.S. economy, for recognizing the high value that Americans place on homeownership, and for focusing on how to address the nation’s housing problems," Nielsen said in a statement.

"Clearly, more decisive actions are needed to increase refinancing opportunities, to reduce the inventory of foreclosed homes and to prevent additional homes from going into foreclosure."

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