In a wholesale attempt to crush the housing bust in its tracks, Obama revealed his $75 billion Homeowner Affordability & Stability Plan to allow 4-5 million so-called “responsible homeowners” to refinance their homes with lower interest rates and help a further 3-4 million lower their monthly mortgage payments.

It’s all designed to help fend off the dreaded specter of foreclosure, which engulfed two million Americans in 2008 – with the plan symbolically announced in Arizona, home to one of the highest home foreclosure rates in the nation.

It’s also well-timed in terms of beefing up support for the plan, amid more gloomy housing market figures from the Commerce Department today…

Housing Market Takes A Tea Break As Builders Down Tools

With housing demand in the dumps and prices still heading south, 2009 got off to a dubious start with the news that the pace of new home construction slumped to its lowest level since 1959.

Notwithstanding the effect that colder weather has on homebuilding, the figures were poor across the entire country still showed huge drop of almost 17% from December to an annual rate of 466,000 and was 12% lower than economists expected. To put that in perspective, homebuilders broke ground on 906,200 new properties in 2008 – and that was a record low. It means that over the past three months of double-digit declines, housing starts have sunk at an 86% annual rate over that period.

Not only that, building permit applications also slid by 4.8% to a record low of 521,000 units.

While the headline figures make for grim reading, it’s worth remembering that with the economy in recession, you wouldn’t expect them to be rising, or even flat. With demand tanking and prices falling, homebuilders have “downed tools” and are more focused on shifting excess existing inventory.

And while Obama may not be able to ride to the rescue on the construction and permits situation right away, his plan today does intend to help Americans already crippled by the real estate mess.

And it will need to, if these figures from Credit Suisse (NYSE:CS) are anything close to accurate…

“Unraveling Homeownership, The Middle Class… And The American Dream Itself”

The two million Americans who faced foreclosure proceedings in 2008 will seem like small potatoes if the Credit Suisse report, released last month, holds true.

It said the number could rise to as many as 10 million over the next few years, depending on the severity of the recession.

And even though the president puts the figure at closer to six million, it’s no wonder that Team Obama is swinging into action.

Calling it a “crisis which is unraveling homeownership, the middle class, and the American Dream itself,” Obama’s bold plan would see the government subsidize his efforts (hey, remember to leave a few more billion for the auto industry, guys).

It’s then hoped that by allowing certain homeowners to refinance and reducing monthly payments, it will help stabilize the market. In return, homeowners would give up a little of their home’s equity by way of repayment.

In short…

• Borrowers who owe more than 80% of their home’s value would be eligible to refinance and lower their monthly payments.
• Through subsidizing interest rates, at-risk borrowers could reduce their monthly payments to no more than 31% of their income. This proposal has drawn understandable criticism from sensible, solvent borrowers, who rightly ask why they don’t get a break for managing their money properly.
• The proposal expands previous rescue efforts by placing emphasis not only on those who have already defaulted on their payments, but also those who are at risk of doing so while still up-to-date. Mortgage servicers will be offered $1,000 incentives to modify agreements of defaulters and those at risk, and any institution that accepts federal funds will be required to abide by a loan modification system.
• The plan will double the financial aid for America’s two big mortgage lenders – Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), who have suffered hugely at the hands of the housing bust themselves – so they can increase the number of mortgages they offer. A restriction that doesn’t allow the two to guarantee refinancing on mortgages worth more than 80% of a home’s value will be removed under Obama’s plan and the government’s guarantee against their mortgage losses will swell to $400 billion.

The goal of this aggressive plan is simple: To arrest the housing market’s deep slump by attacking the foreclosure rate. Or in Obama’s words, allowing “millions of families stuck with loans at a higher rate to refinance” and “give millions of families resigned to financial ruin a chance to rebuild.”

Time will tell whether it ends up being the housing market’s version of “Little House On The Prairie” or “The Money Pit.”

Source: $75 Billion To Help Fix The U.S. Housing Crisis

The numbers offer more evidence of the dismal economic conditions facing President Barack Obama’s administration.

The news confirms a relentless downward spiral for home builders, who have all but shut down building projects as home values plunge and potential buyers stay on the sidelines.

“What you’re seeing is capitulation by home builders,” John Lonski, chief economist at Moody’s Corp. (MCO) told The New York Times. “The news you got today reinforces the view that stabilization of housing starts is well off into the future.”

Housing starts fell 15.5% to a seasonally adjusted annual rate of 550,000 units from an upwardly revised rate of 651,000 units in November, the lowest on record, the Commerce Department reported yesterday (Thursday).

The pace of new-home construction in December was 45% below its levels from a year ago. For all of 2008, the government estimated that 904,300 housing units were started, down 33% from 2007.

A Labor Department report spelled more bad news for the housing market, as the number of Americans filing first-time unemployment claims matched a 26-year high in the week ended Jan. 17. Initial jobless claims increased by 62,000 to 589,000, greater than economists had expected.

“The worst is not over,” Lonski said. “Rising unemployment and tightening credit conditions are worsening the prospects for housing, which by itself suggests that we could be surprised at how poorly the economy performs in the early part of 2009.”

As Money Morningsaid in its 2009 Housing Forecast, skyrocketing unemployment acts like a 1000-pound ball and chain around the neck of the real estate market.

Builders, whose shares have lost 76% of their value over the last three years, are slashing prices to compete with a record number of foreclosed homes coming onto the market, Bloomberg News reported.

“Homebuilders have no choice,” Ryan Sweet, an economist at Moody’s Economy.com, told Bloomberg. “The market is bloated with excess supply and demand is weak. The pace of housing starts will remain depressed until 2011.”

Big homebuilding firms like D.R. Horton Inc. (DHI), Lennar Corp. (LEN) and Toll Brothers Inc. (TOL) are limping along, bleeding cash and fighting for survival. But the downturn isn’t just hurting only big builders anymore.

The malaise is spreading now to the smaller mom and pop builders. Approximately 20% of the nation’s homebuilders have closed their doors.

Hammered by collapsing prices and banks scrounging for cash, even the industry’s brightest stars are finding themselves with their backs against the wall.  Banks are now yanking credit lines from small and mid-size homebuilders even before they miss a single payment, The New York Times reported.

Lenders, for their part, are demanding more collateral to mitigate risk.

That’s what happened to Brown Family Communities, a well-known builder in the Phoenix area. Despite never missing a payment, JP Morgan Chase & Co. (JPM) demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked and lost the property, ultimately closing his doors.

“The real estate market is gone,” Brown said.

Banks like JPMorgan loaned builders hundreds of billions of dollars to buy up vacant land. Now that buyers in some areas can pick up previously constructed homes for less than it costs to build a new one, demand for new homes has plunged. That means builders’ are no longer able to turn a profit.

Obama’s National Economic Council Director Lawrence Summers said last week the president intends to use between $50 billion and $100 billion of the remaining half of the $700 billion bank bailout fund enacted last year to address foreclosures and bring stability to the housing market.

Source: Homebuilders Give Up as New Housing Starts Hit 50 Year Low

However, a new blizzard of government money may be coming to your neighborhood, and it promises to be a true bailout for the masses, not just for those in foreclosure or real financial difficulty.

Tight credit and lending markets, rising foreclosures, and surging unemployment figures have homebuyers on the sidelines, pummeling the fortunes of homebuilders such as D.R. Horton Inc. (DHI), Pulte Homes Inc. (PHM) and Centex Corp. (CTX)

“It is going to be a very cold winter indeed for homebuilders,” Joshua Shapiro, chief U.S. economist for forecasting firm MFR Inc., wrote in a note to clients Monday, MSNBC reported.

And the numbers are grim.

The U.S. Commerce Department yesterday (Tuesday) reported that housing starts, where construction has actually begun, fell 18.9% to a seasonally adjusted annual rate of 625,000 units from 771,000 units in October, much less than the 740,000 starts Wall Street analysts expected.

New building permits, predictive of future home construction, plummeted 15.6% to 616,000 units from 730,000 units in October. That was also way below analyst estimates of 700,000.

Housing starts were down 47% in November from the rate in November 2007 and permits were down 48.1%, the largest year-to-year drops since January 1991.

But on the bright side, any slump in new home construction could help U.S. housing market prices recover.

“The more we have less housing starts, the more we can shrink existing inventory,” Steven Goldman, market strategist at Weeden & Co. LP, told Reuters.

The news comes on the heels of a phalanx of trillion-dollar-government efforts and bailouts to banking and government agencies designed to shore up the housing industry. The economy has a variety of problems, but the housing industry is at the crux of any plan to return the U.S. economy to a healthy state.

Obama’s Housing Plan

Some economists are forecasting gross domestic product (GDP) to fall 8% for the current quarter, making the most drastic policy proposals increasingly palatable.

And the latest plan to emerge from the inner workings of President-elect Barack Obama’s recovery team is a stunner, sporting an astounding price tag of $3 trillion.

According to Bloomberg News, the so-called Hubbard-Mayer plan is being studied by Lawrence Summers, chairman-designate of the National Economic Council, and is already “on a fast track at the Treasury.”

The plan calls for reviving the faltering housing market by providing just about everybody access to a 30-year fixed-rate mortgage with a 4.5% interest rate. That’s almost a full percentage point below the current national average rate of 5.47%. The plan might even be available to existing homeowners who want to refinance their mortgages.

The bottom line: If you have a mortgage, this plan would put extra money in your pocket.

Assume a homeowner currently has a $500,000, 30-year fixed rate mortgage at 6.1%, the average rate issued this year, lowering the interest rate to 4.5% would lower the monthly payment by about $500.

The thinking of the Obama team is that this plan might just be the magic bullet needed to turn the economy around.  After all, if Joe Taxpayer’s monthly housing payment drops by $500, he might not be afraid to go out and purchase that new car he’s been eying.

The effects from millions of subsidized mortgages like these could dramatically increase the number of home buyers and help stabilize or even push property values back up.

But the plan could be so expensive that the Treasury may try to limit it to new home buyers, preventing homeowners who want to refinance from participating.

That, however, might be impossible to enforce.  According to one scenario sketched out by experts, creative homeowners could simply draft a friend into an deal under which each would agree to buy the other’s house, grabbing the new 4.5% loan to do so. Then they could quit, claim the deed back, or rent them to each other for the same price.

This mortgage plan is radical, and might just be powerful enough to help turn this troubled economy around. And a $3 trillion bailout would have something for almost everyone.

Source: With New Home Construction Down, Obama Team Plans ‘Bailout for the Masses’