President Obama's Mortgage Relief Plan explained

President Barack Obama says his $75 billion plan to tackle the foreclosure crisis won't save every home. He says its goal is to keep the problem from doing more damage to the economy.

Obama unveiled his plan in Arizona, which has been hit hard by the housing crunch.

The president's plan to help Americans keep their homes includes incentives for lenders to cut monthly mortgage payments for those on the brink of foreclosure. And it would help millions of borrowers refinance if their mortgages are owned or guaranteed by Fannie Mae or Freddie Mac.

The following breakdown of President Obama's mortgage relief plan comes from financial advisor Derieck Hodges.

President Obama's Mortgage Relief Plan

Part 1

  • The plan would help borrowers who owe more than 80% of their home's value to refinance and reduce their loan payments.
  • You must be current on your payment and your loan must conform to Fannie Mae and Freddie Mac standards.
  • Finally, you can't owe more than 105% of the current market value.
  • Program starts March 4, 2009.
Part 2 - Homeowner Stability
  •  $75 billion has been set aside to reduce monthly payments for at-risk borrowers by subsidizing interest rates. The goal would be to reduce monthly payments to 31% of the borrower's income.
  • The lenders would alter the loans, either by interest rate or principal adjustments, so that the payment is no more than 38% of the borrower's income. Then the government would subsidize the interest rate or principal adjustments necessary to get the debt-to-income ratio to 31%.
Part 3 - Shore up Fannie Mae and Freddie Mac.
  • Several measures are being put in place to strengthen the two firms' balance sheets and ability to assume mortgages.
Part 4 - Bankruptcy changes
  • The Obama administration also plans to work with Congress to amend bankruptcy laws to allow judges to modify mortgages.