President Barack Obama announced his sweeping $75 billion foreclosure crisis plan but Wall Street’s initial reaction seems to be the same as it was when he signed the landmark stimulus bill: stocks tumbled.
Wall Street extended its decline Wednesday after President Barack Obama released details of his $75 billion mortgage relief plan.
The plan is designed to help stabilize the housing market and reduce foreclosures. Sharp drops in housing prices and sales, coupled with rising foreclosures since the middle of 2007, have been a primary cause of the toughest recession in decades.
Mr. Obama’s announcement of the plan comes a day after he signed into law a $787 billion economic stimulus plan he hopes will help revive the economy.
In midmorning trading, the Dow Jones industrial average fell 25.40, or 0.34 percent, to 7,527.20.
Broader stock indicators also slid. The Standard & Poor’s 500 index fell 3.58, or 0.45 percent, to 785.59, and the Nasdaq composite index fell 4.80, or 0.33 percent, to 1,465.86.
The Russell 2000 index of smaller companies fell 4.27, or 1.00 percent, to 424.63.
UPDATE: Here’s his speech:
Obama’s argument in announcing his plan to try and help save millions of homeowners from losing their homes is two-pronged: (1) We’re all in this together, (2) The crisis is worse than it seems at first glance and can get even worse if we don’t do something about it. Here’s the White House website’s FAQs on the plan. The Swamp reports:
President Barack Obama, announcing a $75-billion federal aid plan for millions of homeowners facing mortgage foreclosures, today will say the nation is facing “a crisis unlike any we’ve ever known.”
Appearing in Mesa, Arizona, to announce the Treasury Department’s plans for some of the $700-billion in financial market bailout funds that Congress approved earlier this winter, plans to say: “The American Dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods.
“It is a crisis that strikes at the heart of the middle class: the homes in which we invest our savings, build our lives, raise our families, and plant roots in our communities,” the president plans to say.
Obama, citing conversations he has had with homeowners in crisis “along the rope lines” of the campaign trail and his presidency, and in letters and emails that he has received, plans to say “their hardship and heartbreak are a reminder that while this crisis is vast, it begins just one house – and one family – at a time. ”
Nearly six million Americans are in foreclosure or at risk of foreclosure, the White House says, including about 150,000 in Arizona.
“The effects of this crisis have also reverberated across the financial markets,” Obama plans to say, according to remarks released by the White House. “When the housing market collapsed, so did the availability of credit on which our economy depends. As that credit has dried up, it has been harder for families to find affordable loans to purchase a car or pay tuition and harder for businesses to secure the capital they need to expand and create jobs.
“In the end, all of us are paying a price for this home mortgage crisis,” he will say. “And all of us will pay an even steeper price if we allow this crisis to deepen – a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit. ”
The AP notes that this plan is bigger than expected:
In tandem, the Treasury Department said it would double the size of its lifeline to Fannie Mae and Freddie Mac. The government, which seized the mortgage finance companies last fall, said Wednesday it would absorb up to $200 billion in losses at each company.
The plan, which Obama is releasing later Wednesday, is more ambitious than initially expected — and more expensive. It aims to aid borrowers who owe more on their mortgages than their homes are currently worth, and borrowers who are on the verge of foreclosure.
….Another key component: a new program aimed at helping homeowners said to be “under water” — with dwellings whose value have sunk below the principal still owing on their mortgages. Such mortgages have traditionally been almost impossible to refinance. But the White House said its program will help 4 to 5 million families do just that.
Of the nearly 52 million U.S. homeowners with a mortgage, about 13.8 million, or nearly 27 percent, owe more on their mortgage than their house is now worth, according to Moody’s Economy.com
Announcing his plan in a state hard hit by the housing crunch, Obama said that stemming the tide of foreclosures is key to turning around the recession-bound economy.
It’s clear by the reaction of Wall Street that Obama will have to sell his plans as Communicator-In-Chief: he’ll have to get out on the hustings and talk about it, talk to the press and to political and business elites. Wall Street seems numbed because each day the new financial news is worse.
The Detroit Free Press offers some more details:
That could be especially good news in Detroit. RealtyTrac, a company that tracks foreclosures nationally, said metro Detroit remained among the Top 10 for foreclosures last year. The state of Michigan ranked seventh. But that is underscored by the fact that the foreclosure crisis hit southeastern Michigan earlier than in many other places and has been exacerbated by the highest jobless rate in the nation.
The first part of the Obama plan would allow 4 million to 5 million people with loans owned or guaranteed by government-sponsored lenders Fannie Mae and Freddie Mac refinance to a lower-interest mortgage even if the homeowner doesn’t have 20% equity in the home. Fannie and Freddie back most American mortgages.
Here’s how it would work: In many communities, home values have dropped to the point that, even though an owner is current on mortgage payments, his or her equity in the property may be less than 20% than the cost of their loan. For instance, say you bought a home that when you purchased it was valued at $260,000. At this point, you still owe your mortgage lender about $200,000 on the loan with a rate of 6.5% and you suspect you’ll have trouble keeping up with the payments.
You could negotiate to a lower interest rate with your lender but if the home’s value has dropped to, say, $220,000, you still owe more than 80% of the value – meaning you have less than 20% equity in the house. And under those rules, Fannie Mae and Freddie Mac typically can’t negotiate a lower interest refinancing for you.
Obama, however, says he would get those lenders to accept less than 20% equity – meaning you could get a lower interest loan and ostensibly stay in the home.
A second part of the plan would create what the president is calling a “homeowner stability initiative” that he says could help 3 million to 4 million homeowners who could face foreclosure by pushing lenders to renegotiate mortgages to keep people in their homes.
Watch the reactions on Wall Street, the response of the punditry (apart from the ideological pundits who will respond supporting or opposing whatever someone from their or another party says or proposes because that person belongs to or doesn’t belong to their party), and watch the comments from a wide range of GOPers. A key question will then become: if this isn’t an even partial solution, then what are the other options?
Here’s the full text of Obama’s housing speech.
UPDATE: USA Today’s The Oval blog has extensive live blogging on the announcement.
Joe Gandelman is a former fulltime journalist who freelanced in India, Spain, Bangladesh and Cypress writing for publications such as the Christian Science Monitor and Newsweek. He also did radio reports from Madrid for NPR’s All Things Considered. He has worked on two U.S. newspapers and quit the news biz in 1990 to go into entertainment. He also has written for The Week and several online publications, did a column for Cagle Cartoons Syndicate and has appeared on CNN.