Bailout Plans and Foreclosure

Bailouts and Foreclosures

Bailout plans are designed to help large financial institutions and insurance agencies lessen the impact of loss tied to the rising rates of foreclosures. Bailout plans offer these institutions a hedge of financial protection against the losses suffered by defaulted mortgages on homes with little to no equity, and have a substantial effect on the national economy.

Obama's Foreclosure Bailout Plan

Known as the "Help for Homeowner's Plan," this act of President Obama became effective in March of 2009. This bailout package provided lenders a $75 billion dollar bailout plan to offset the costs associated with foreclosures, which were climbing at an alarming rate. With this plan, the lenders were offered compensation for creating work out plans with homeowners who had less than 20 percent equity built in their home and homeowners whose properties declined in value, putting them underwater on their mortgage.

Mortgage Insurance

Homeowners with government-backed loans and many conventional loans paid an up-front mortgage insurance premium at closing as well as a monthly insurance premium that was added into their mortgage. This was originally designed to protect lenders investment in a property if the homeowner defaulted, preventing a need for bailout plans. The two largest purchasers of mortgages and holders of mortgage insurance premiums are Fannie Mae and Freddie Mac.

The real estate market decline that began in 2007 and escalated into 2009 created plummeting home prices across the nation, devaluing loans and property. Added economic struggles appeared in 2008, as unemployment rates climbed to over 8 percent and many Americans struggled to maintain mortgage payments.

The housing boom that occurred in 2005 and 2006 created the highest rate of home ownership that the United States had ever seen. However, homeowners living in a home for less than 10 years had little to no equity. With falling home prices, many of them owed more on their property than the property was worth and had not been paying into the mortgage insurance premium fund long enough to stave off financial ruin for mortgage holders when their mortgages went into default.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac were the largest holders of mortgages in the secondary mortgage market. Essentially, these institutions backed and held the insurance funds for lenders. As economic conditions declined in the U.S., Fannie Mae and Freddie Mac began to run out of funds to pay out to the mortgage companies that were experiencing increased rates of foreclosure. It was because of this shortage, and many mortgage companies suddenly on the brink of bankruptcy due to loss, that the government stepped in.

Consumer Impact

The impact of the mortgage financial bailout package has had a major impact on consumers as well. It was anticipated that the Help for Homeowners plan will have assisted in keeping over 4 million families in their homes by providing work out plans to lower interest rates and make mortgage payments more affordable. While the bailout plan is not ideal for all U.S. homeowners, it has had a more beneficial impact than not in the grand scheme of home ownership and the U.S. economy.

Expert Insight

According to an article in the New York times, Meridith Whitney, a prominent financial services analyst was quoted as saying, "To think that it (bailout repayment) won't come out of consumers and businesses is mistaken."

Essentially, the speculation by financial analysts such as Ms. Whitney is that no bailout plan comes without a price to Mr. and Mrs. Taxpayer. The monies utilized to help keep the economy out of complete financial ruin with the foreclosure crisis will ultimately result in income tax increases for most households. Even with economic conditions improving and housing markets stabilizing across the nation, the $75 billion dollar bailout plan will be factored into the national debt, and will have to be paid back.

The only way to assuage this massive impact to the financial market will be with massive increases in housing values over the next 20 years, and no financial advocate can predict where the economy will be at that juncture. The bailout plan offered to assist in slowing foreclosure rates could be something that the American taxpayers feel the brunt of for an entire lifetime.

References

• The New York Times: Obama Unveils a Tax on Banks
• The New York Times: Bailout Plan
• The White House Blog: Help for Homeowners