Senator Barack Obama looks over a speech on his campaign plane

If Barack Obama had not chosen a life in politics, he might have made a fine psychotherapist. He is a master at taking what you've told him and feeding it right back. What I hear you saying is....
Open his book The Audacity of Hope to almost any page and listen. On immigration, for example, Obama first mirrors "the faces of this new America" he has met in the ethnic stew pot of Chicago: "in the Indian markets along Devon Avenue, in the sparkling new mosque in the southwestern suburbs, in an Armenian wedding and a Filipino ball." Then he pivots to give voice to the "anxieties" of "many blacks" and "as many whites about the wave of illegal immigration," adding: "Not all of these fears are irrational." He admits that he knows the "frustration" of needing an interpreter to speak to one's auto mechanic and in the next breath cherishes the innocent dreams of an immigrant child.

In other words, he hears America singing — and griping, fretting, seething, conniving, hoping, despairing. He can deliver a pitch-perfect expression of the racial anger of many American blacks — as he did in his much discussed speech on race relations earlier this year — and, just as smoothly, unpack the racial irritations gnawing at many whites. To what extent does he share any of those emotions? The doctor never exactly says.
Consciously or unconsciously, Obama has been honing this technique for years. During his time at Harvard Law School in the 1980s, the student body was deeply divided. In one heated debate, Obama so adroitly summarized the various positions without tipping his own hand that by the end of the meeting, as Professor Charles Ogletree told one newspaper, "everyone was nodding, Oh, he agrees with me."

He has been called a window into the American psyche. Or you might say he's a mirror — what you see depends on who you are and where you stand. Obama puts it this way: "I serve as a blank screen on which people of vastly different political stripes project their own views." But those metaphors all suggest that he is some sort of passive instrument, when in fact his elusive quality is an active part of his personality. It's how you square the fact that Obama once wrote the most intimate memoir ever published by a future nominee yet still manages to avoid definition. At his core, this is a deeply reserved and emotionally reticent man. Consider this anecdote from Dreams from My Father: as a young man in New York City, he lived next door to an elderly recluse "who seemed to share my disposition." When he happened to meet his neighbor returning from the store, Obama would offer to carry the old man's groceries. Together, the two of them would slowly climb the stairs, never speaking, and at the top, the man would nod silently "before shuffling inside and closing the latch ... I thought him a kindred spirit," Obama concludes.

Both his rhetorical style and his ingrained disposition tend to obscure rather than reveal. This is how Obama remains enigmatic no matter how much we see of him. As the campaign enters its last chapter, it may not be enough for him to say, as he often does, "This election is not about me ... this campaign is about you." Supporters and opponents alike want a clearer picture of Obama, and they are selecting elements of his words, policies, public record and biography to shape their clashing interpretations. Those pieces of Obama are also open to interpretation, because so few of them are stamped from any familiar presidential mold: the polygamous father, the globe-traveling single mother, the web of roots spreading from Kansas to Kenya, friends and relatives from African slums to Washington and Wall Street, and intellectual influences ranging from Alexander Hamilton to Malcolm X. Four of the faces of Obama pose various threats to his hopes for victory. The fifth is the one his campaign intends to drive home, from the convention in Denver right to Election Day.

1. The Black Man

Henry Louis Gates Jr. once wrote an essay on the life of writer Anatole Broyard, the light-complexioned son of two black parents who lived his life passing as a white man. "He wanted to be a writer," Gates explained, but "he did not want to be a Negro writer. It is a crass disjunction, but it is not his crassness or his disjunction ... We give lip service to the idea of the writer who happens to be black, but had anyone, in the postwar era, ever seen such a thing?"
Obama tells a parallel story in his memoir, the journey of a man raised by his Caucasian mother and grandparents who seeks his identity as an African American. Along the path, he was drawn to a number of older black men who argued that America's racial divide is absolute and unbridgeable. Obama recalls a visit as a teenager to the home of a black man his white grandfather considered a friend. To his surprise, the man explained that it was hopeless to think any white man could truly befriend someone black. "He can't know me," the man said of Obama's grandfather. No matter how close they might seem, "I still have to watch myself."
That is resolutely not the message communicated in Obama's campaign, however. "I reject a politics that is based solely on racial identity, gender identity, sexual orientation or victimhood generally," he has declared. He enjoys nearly unanimous support from African Americans in polls; nevertheless, just as Broyard sought to avoid being labeled a "Negro writer," Obama resists efforts to define him as a "black candidate." And for some of the same reasons too. As soon as the race label is added, some of the audience tunes out, others are turned off and still others leap to conclusions about who you are and how you think. Obama has written that race was his "obsession" growing up but that he long ago left that burden behind. Now he lays claim to the whole spectrum: "the son of a black man from Kenya and a white woman from Kansas" with "brothers, sisters, nieces, nephews, uncles and cousins, of every race and every hue, scattered across three continents."

The question, to borrow from Gates, is whether enough people in 2008 are ready to imagine such a thing. There's an interesting scene in Dreams in which Obama meets for the first time another of those influential elders — the Rev. Jeremiah Wright. Earlier this year, Wright's comments about race led Obama to repudiate his former pastor. In an uncanny way, this conversation from more than 20 years ago goes directly to the heart of Obama's current dilemma. The eminent sociologist William Julius Wilson had published a book arguing that the role of race in shaping society was giving way to class. But for Wright, the concept of a postracial politics simply didn't compute. "These miseducated brothers," the pastor fumed to the young Obama, "like that sociologist at the University of Chicago, talking about 'the declining significance of race.' Now, what country is he living in?"

If identity politics might gain some black votes for Obama, it can also cost him votes elsewhere. So how many Americans will agree with Wright that race is still front and center? The number is notoriously slippery, because voters don't always tell pollsters the truth. At the Weekly Standard, a magazine with a neocon tilt, writer Stanley Kurtz rejects Obama's postracial message because he suspects it isn't sincere. Probing the coverage of Obama's career as an Illinois legislator in the black-oriented newspaper the Chicago Defender, Kurtz concluded, "The politician chronicled here is profoundly race-conscious." Though Kurtz's message is aimed primarily at whites, it's not so different from one angrily whispered by Jesse Jackson. "I want to cut his nuts off," Jackson fumed — because he believes that Obama's race ought to determine which issues the candidate raises and how he discusses them. Either way, whether an opponent claims that Obama remains race-conscious or a supporter says he ought to be, both are rejecting the foundation of his campaign.

Figures like Jackson and Wright have invested a lifetime in the politics of black identity. Obama's success, whether it culminates in the White House or not, signals the passing of their era. So it is no wonder that younger voters have been key to his candidacy. Having grown up in the era of Oprah Winfrey, Denzel Washington, Tiger Woods and, yes, Henry Louis Gates Jr., they are better able to credit Obama's thesis that "there's not a black America and white America and Latino America and Asian America; there's the United States of America."

2. The Healer

Dreams from My Father is the story of a quest — not for honor or fortune but for meaning. The book presents a wounded young man who has never felt entirely at home — not among whites or among blacks, neither in slums nor in student unions — and is haunted by "the constant, crippling fear that I didn't belong." He wants to know how to feel rooted and purposeful. At the end of his odyssey, he decides to take a leap of faith. For the young Obama, "faith in other people" becomes his home.

This is what he preaches: the seemingly unlimited power of people who are willing to trust, cooperate and compromise. Bringing people together for action, what he calls "organizing," holds "the promise of redemption." And without exactly saying it, Obama offers himself as the embodiment of his own message, the one-man rainbow coalition. You don't believe white and black can peacefully, productively coexist? Think the gulf between Chicago's South Side and the Harvard Law Review can never be bridged? Do you fear that the Muslim masses of Africa and Asia are incompatible with the modernity of the West or that cosmopolitan America and Christian America will never see eye to eye? Just look at me! It's not unusual to meet Obama supporters who say the simple fact of electing him would move mountains, changing the way the world looks at America, turning the page on the nation's racial history and so on. He is the change they seek.

The message doesn't work for everyone: so far, Obama's numbers in the national polls average below 50%. But his enormous and enthusiastic audiences are evidence that many people are intrigued, if not deeply moved. "Yes, we can!" turns out to be a powerful trademark at a time when 3 out of 4 Americans believe the country is on the wrong track. Many Democrats placed their political bets on anger in recent years: anger at the war, anger over the disputed election in 2000, anger at Bush Administration policies. Obama doubled down on optimism, beginning with his careermaking speech at the 2004 Democratic Convention: "Hope in the face of difficulty, hope in the face of uncertainty, the audacity of hope. In the end, that is God's greatest gift to us, the bedrock of this nation, a belief in things not seen, a belief that there are better days ahead."

If you click deeply enough into Obama's website, you can find position papers covering enough issues to fill Congressional Quarterly. He has a specific strategy to refocus the military on Afghanistan. He backs a single-payer health-care system. But it wasn't some 10-point plan that turned Obama into a politician who fills arenas while others speak in school cafeterias. He knows that detailed policies tend to drive people apart rather than bring them together. People arrived to hear him out of fervor or mere curiosity, and they stayed for the sense of possibility. They heard rhetoric like this, from his speech claiming victory after his epic nomination battle: "If we are willing to work for it and fight for it and believe in it, then I am absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs to the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last, best hope on Earth."

That's a pretty quick step from an election to nirvana, and Obama's opponents would like to turn such oratory against him. No one does it more effectively than radio host Rush Limbaugh, with his judo-master sense for his foes' vulnerabilities. Limbaugh rarely refers to Obama by his name. Instead, he drops his baritone half an octave and calls him "the messiah."

3. The Novice

Obama's critics tend to paint him two ways — related portraits but subtly different. The first is a picture of an empty suit, a man who reads pretty speeches full of gossamer rhetoric. "Just words," as Senator Hillary Clinton put it.

And it's true that Obama doesn't have a thick record of businesses he has built or governments he has run. For one thing, he has moved around too much. The restlessness in his résumé is striking: two years at Occidental College, two years at Columbia University, a year in business, three years as a community organizer and then law school. Obama's four two-year terms in the Illinois state senate are his version of permanence, but in two of those terms, he was busy running for higher office.

Voters accustomed to evaluating governors and generals may have a hard time deciding what value to place on a stint of "organizing." But it was surely real work. Reading Obama's account of his efforts to organize the residents in a single Chicago neighborhood, with weeks of toil going into staging a single meeting, is like watching a man dig the Panama Canal with a Swiss Army knife.

As for his conventional training, friends of Obama's like to point out that 12 years as a lawmaker is more experience than Abraham Lincoln, the original beanpole from Illinois, had in 1860. They note that the issues Obama is most drawn to — health-care reform, juvenile justice, poverty — aren't the easiest. They tell the story of his artful arm-twisting and cajolery in the Illinois senate on behalf of bills to reform campaign-finance laws and require police to videotape interrogations. Obama worked his colleagues one by one, on the floor, on the basketball court, at the poker table, and managed to pass some difficult legislation. "He's unique in his ability to deal with extremely complex issues, to reach across the aisle and to deal with diverse people" one Republican colleague, McCain supporter Kirk Dillard, told the Wall Street Journal.

That wasn't enough to impress Clinton in the primaries. She enjoyed noting that Obama was chairman of a Senate subcommittee yet had never convened a substantive hearing. John McCain's campaign will not be any more dazzled. In a sense, the question of Obama's preparation hinges on data that are still being gathered, because his greatest accomplishment is this unfolding campaign. For a man given to Zen-like circularities — "We are the change we seek" — the best proof that he can unite people to solve problems might be his ability to unite them to win an election.

4. The Radical

Others believe Obama is like the clever wooden offering of the Greeks to Trojans: something that appears to be a gift on the outside but is cunningly dangerous within. They find in his background and in what he leaves unsaid telltale signs of a radical. Obama has worked on education issues in Chicago with William Ayers and has visited the home of Ayers and his wife Bernadette Dohrn. Both were leaders of the violent, leftist Weather Underground. But the indictment of Obama framed by his opponents starts years earlier in Hawaii, with the black man who told Obama that a true friendship with his white grandfather wasn't possible. The man's name was Frank Marshall Davis, and in the 1930s, '40s and early '50s he was a well-known poet, journalist and civil rights and labor activist. Like his friend Paul Robeson and others, Davis perceived the Soviet Union as a "staunch foe of racism" (as he later put it in his memoirs), and at one point he joined the Communist Party. "I worked with all kinds of groups," Davis explained. "My sole criterion was this: Are you with me in my determination to wipe out white supremacy?"

The conservative group Accuracy in Media (AIM) is eager to paint the radical picture. In press releases and website articles, AIM calls Davis "Obama's Communist Mentor," although by the time they met, Davis had been out of politics for decades, and "mentor" may exaggerate his role in the young man's life. Still, it's clear that Obama did seek advice from the old man and that what he got was undiluted. "You're not going to college to get educated. You're going there to get trained," Davis once warned Obama. "They'll train you so good, you'll start believing what they tell you about equal opportunity and the American way and all that s___." Did the future candidate take this to heart? Not according to him. "It made me smile," Obama recalls, "thinking back on Frank and his old Black Power dashiki self. In some ways he was as incurable as my mother, as certain in his faith, living in the same '60s time warp."

Obama's memoir displays more familiarity with the ideas of the far left than most American politicians would advertise. His interest in African independence movements led him to the seminal work of Frantz Fanon, a Marxist sociologist, and he speaks in passing of attending "socialist conferences" at the Cooper Union in New York City. But as Obama told TIME, this was in the Reagan years, and he was also reading works by conservative giants like Milton Friedman and Friedrich Hayek. He browsed among the ideologues but never bought in, he said. "I was always suspicious of dogma and the excesses of the left and the right."

Not all Obama critics see red, of course. Some merely believe he is more liberal than he claims to be. They cite a National Journal study, which Obama disputes, that rated him the most liberal member of the U.S. Senate, and they aren't dissuaded by the candidate's recent positions in favor of gun owners and an electronic-surveillance bill loathed by civil libertarians.

There is another Trojan-horse interpretation just below the radar. It is the idea that a man named Barack Hussein Obama might be hiding a Muslim identity. Obama has tackled this dozens of times. His Kenyan grandfather was indeed a Muslim; his father espoused no faith; Obama attended a Muslim school in Indonesia for a time as a boy because that's where he lived — Indonesia is a Muslim country. He believed in no religion until he moved to Chicago as a grown man and was baptized Christian by Wright. As campaign spokesman Robert Gibbs puts it, "His Christian pastor and this Muslim thing — how can he have problems with both at the same time? Pick one."

But that's the problem with having five faces. There's more than one to choose from. The "secret Muslim" rumors about Obama may be scurrilous, but they survived the sudden fame of Obama's card-carrying Christian pastor. A recent poll found that 12% of Americans believe them.

5. The Future

Back up a few paragraphs and look again at something Obama wrote in his memoir. It's that passing reference to his mother living in a "'60s time warp." No presidential nominee since John F. Kennedy has so lightly dismissed those turbulent years. What could the Summer of Love have meant to a 6-year-old in Hawaii, or Woodstock to an 8-year-old in Indonesia? The Pill, Vietnam, race riots, prayer in school and campus unrest — forces like these and the culture clashes they unleashed have dominated American politics for more than 40 years. But Obama approaches these forces historically, anthropologically — and in his characteristic doctor-with-a-notepad style. In The Audacity of Hope, he writes about the culture wars in the same faraway tone he might use for the Peloponnesian Wars. ("By the time the '60s rolled around, many mainstream Protestant and Catholic leaders had concluded," etc.) These fights belong to that peculiar category of the past known as stuff your parents cared about.

"I think that the ideological battles of the '60s have continued to shape our politics for too long," Obama told TIME. "The average baby boomer, I think, has long gotten past some of these abstract arguments about Are you left? Are you right? Are you Big Government? Small government? You know, people are very practical. What they are interested in is, Can you deliver schools that work?"

This aspect of Obama — the promise to "break out of some of those old arguments" — speaks powerfully to many younger Americans, who have turned out in record numbers to vote and canvass for him. Obama is the first national politician to reflect their widespread feeling that time is marching forward but politics is not, that the baby boomers in the interest groups and the media are indeed trapped in a time warp, replaying their stalemated arguments year after year. The theme recurs in conversations with Obama supporters: He just feels like something new.

Obama on the stump is constantly underlining this idea. As he told a recent town-hall meeting in a New Mexico high school gym, "We can't keep doing the things we've been doing and expect a different result." It's a message his campaign organization has taken to heart. Obama's is the first truly wired campaign, seamlessly integrating the networking power of technology with the flesh-and-blood passion of a social movement. His people get the fact that the Internet is more than television with a keyboard attached. It is the greatest tool ever invented for connecting people to others who share their interests. For decades, the Democratic Party has relied on outside allies to deliver its votes — unions, black churches, single-interest liberal groups. With some 2 million volunteers and contributors in his online database, Obama is perhaps a bigger force now than any of these. McCain may perceive Obama's enormous celebrity as a weakness — workhorse vs. show horse — but celebrity has its benefits. Obama will accept the nomination in front of a crowd of 76,000 in Denver's professional-football stadium, and the price of a free ticket is to register as a campaign volunteer.

Each of the first four Obama faces presents risks for his campaign, but the fifth prospect offers a way around many of them. If he can get through a general-election campaign without enlisting in the culture wars, he gains credibility as something new. That in turn might keep him from becoming mired in the trap of identity politics. Branding himself as the face of the future can neutralize the issue of inexperience. And if he can build his own political network strong enough to win a national election, he will lend credibility to his almost mystical belief in the power of organizing.

Obama's banners tout CHANGE WE CAN BELIEVE IN, and this slogan cuts to the heart of the task before him. The key word isn't change, despite what legions of commentators have been saying all year. The key is believe. With gas prices up and home prices down; with Washington impotent to tackle issues like health care, energy and Social Security; with politics mired in a fifty-fifty standoff between two unpopular parties — plenty of Americans are ready to try a new cure. But will they come to believe that this new doctor, this charismatic mystery, this puzzle, is the one they can trust to prescribe it?

President-elect outlines recovery plan, warns worst may be yet to come

U.S. President-elect Barack Obama said on Saturday that he was crafting an aggressive, two-year stimulus plan to revive the troubled economy, warning that swift action was needed to prevent a deep slump and a spiral of falling prices.

"If we don't act swiftly and boldly, most experts now believe that we could lose millions of jobs next year," Obama said in prepared remarks for the weekly Democratic radio and video address.

"We now risk falling into a deflationary spiral that could increase our massive debt even further," he said.

A day after U.S. stock markets rallied on his apparent choice of Timothy Geithner as Treasury secretary, Obama gave a bleak assessment of the economy in his most detailed comments on the subject since winning the Nov. 4 election.

Obama in October called for a $175 billion stimulus measure, but his comments in the radio address on Saturday signaled he was prepared to push for a much larger package, though he did not give a price-tag.

The economic recovery plan being developed by his staff aims to create 2.5 million jobs by January 2011, and he wants to get it through Congress quickly and sign it soon after taking office.

He called the plan "big enough to meet the challenges we face" and said that it will jump-start job creation but also "lay the foundation for a strong and growing economy."

The proposal for a two-year stimulus plan further indicated a sizable effort. Most such plans are aimed at covering a one-year period.

The number of Americans on the unemployment rolls surged to the highest level in 16 years, up more than 540,000, the Labor Department said on Thursday.

'Ignored for far too long'
Obama said his plan would rebuild roads and bridges and modernize schools while developing alternative energy sources and more efficient cars.

"These aren't just steps to pull ourselves out of this immediate crisis; these are the long-term investments in our economic future that have been ignored for far too long," Obama said.

A trio of crises — housing, credit and financial — have badly damaged the economy, and financial analysts have projected the country's economic hardships will continue through much of 2009.

Obama acknowledged Saturday that evidence is growing the country is "facing an economic crisis of historic proportions." He noted turmoil on Wall Street, a decrease in new home purchases, growing jobless claims and the menacing problem of deflation.

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He said he was pleased Congress passed an extension of unemployment benefits this week, but added, "We must do more to put people back to work and get our economy moving again."

He cautioned, "There are no quick or easy fixes to this crisis, which has been many years in the making, and it's likely to get worse before it gets better." But Obama said Inauguration Day, Jan. 20, "is our chance to begin anew."

Obama said getting congressional approval for his broad economic plan will not be easy.

"I will need and seek support from Republicans and Democrats, and I'll be welcome to ideas and suggestions from both sides of the aisle," he said. "But what is not negotiable is the need for immediate action."

Across the country, Americans "are lying awake at night wondering if next week's paycheck will cover next month's bills," people are showing up at work to clear out their desks and retirees are watching their life savings disappear, Obama said.

Senate majority leader Harry Reid said congressional Democrats will "continue pushing for aggressive but necessary measures" to improve the economy. He said part of that included passing a substantial recovery package like Obama's.

Concluding his radio message, Obama said in this country's darkest hours, the American people have risen above their divisions to solve their problems.

"We have acted boldly, bravely, and above all, together," Obama said. "That is the chance our new beginning now offers us, and that is the challenge we must rise to in the days to come. It is time to act. As the next president of the United States, I will."

Foreclosure prevention effort starting Wednesday relies on modifying loans based on borrowers' ability to pay. Will this effort work where others have failed?


Mortgage modifications have a bad rap, yet President Obama is depending on them to stop the foreclosure crisis.

Modifications continue to be pushed as the best way to get struggling borrowers back on their feet. The jury is out on whether modifications work long-term. One recent study showed about half of borrowers with modified loans fell behind within six months.

Still, Obama is giving modifications a central role in his $75 billion foreclosure prevention program.

The program, which starts on Wednesday, calls for loan servicers to lower struggling borrowers' interest rates so that total payments are no more than 31% of their gross income. The government will subsidize part of the reduction, as well as kick in incentives for the servicers, borrowers and mortgage investors to participate in the modifications. (See "Do you qualify?")

The program is getting mixed reviews.

Industry experts applaud the president's emphasis on making payments affordable, a criteria made popular last year by Federal Deposit Insurance Corp. chief Sheila Bair. But, they say, the plan will fall short without a stronger push to reduce loan balances for those who owe more than their homes are worth and without a better plan for those deep in all kinds of debt.
Modification problems

Servicers are increasingly turning to modifications as the foreclosure crisis escalates. They have modified about 1.3 million loans between July 2007 and January 2009, according to statistics released Tuesday by Hope Now, an alliance of the mortgage industry and housing counselors. The efforts - which usually involve adjusting interest rates, loan length or principal balance - have been largely voluntary and uncoordinated.

In recent months, modifications have come under attack as a mere short-term fix. In December, the Office of the Comptroller of the Currency added fuel to that fire by reporting that more than half of borrowers with loans adjusted in the first half of 2008 were behind in their payments six months later. The Hope Now survey shows that between 30% and 40% of modifications had re-defaulted within six months.

But many modification supporters said reports of redefaults don't take into account how loans were modified. Until recently, the adjustments often entailed increasing the monthly payments to make up for the arrears.

Some 34% of mortgages modified in November resulted in a higher payment, while another 17% had no change in payment, said Alan White, a law professor at Valparaiso University. More than nine of 10 voluntary modifications in 2008 involved no cancellation of principal, past-due interest, late fees or expenses.

"The redefault problem has resulted in criticism of the very idea of modifying mortgage loans," White wrote in a January report. "On the other hand, there is considerable evidence that more aggressive modifications, especially those that reduce the principal debt, are much less subject to high rates of redefault."

In recent months, however, more servicers have focused on adjusting borrowers' payments to an affordable level, usually between 31% and 38% of a borrower's gross monthly income. Housing advocates, as well as industry officials, hope this will increase modifications' success rate.

"Affordability makes sense," said Faith Schwartz, Hope Now's executive director. "It's certain a key factor in why modifications will work even better."

It's too early to tell how well this new breed of modifications will perform. But an October Credit Suisse study showed that only 15% of interest-rate modifications and 23% of principal-reduction modifications made at the end of 2007 were delinquent eight months later, compared to 44% of adjustments that resulted in higher payments.

"Lots of modifications have not been done with a rigorous ability-to-pay criteria. As evidence of that, we see the high redefault rates," said Rod Dubitsky, head of asset-backed securities research at Credit Suisse. "Modifications that more carefully consider ability to pay should have a lower redefault rate."

Advocates also take heart in the relative success rate of servicers who have long focused on affordability. Take Ocwen Financial Corp. The servicer boasts of a 19.4% redefault rate, less than half the industry average.

The West Palm Beach, Fla.-based firm says most of its borrowers remain current because of its customized approach to modifications. Ocwen looks at borrowers' income and expenses and comes up with a payment plan that the homeowner can afford long-term. The company says it has prevented more than 90,000 foreclosures since the mortgage crisis began.

"If loan modifications are to have an enduring impact, the reduced mortgage payments must be sustainable by homeowners," Ocwen Chief Executive William Erbey said in a hearing before Congress a week ago.
Controversial principal reductions

Unlike most servicers, Ocwen has embraced principal reductions. Nearly 19% of its loan modifications include writing down the mortgage balance. This is an important step to achieving an affordable payment while still maximizing the payout for the mortgage investor, the company says.

Obama's plan has come under fire for not doing more to encourage servicers to reduce loan balances, a step which would help borrowers who have seen their home values plummet. The program does allow servicers to reduce principal, but makes interest rate adjustments the primary method for achieving affordable payments.

One in six homeowners are "underwater," meaning they owe more on their mortgage than the house is worth, according to Zillow.com. Though experts are divided in their opinion, many say that the foreclosure crisis won't be stemmed until something is done to help these borrowers - namely, principal reductions to bring the loan balance in line with the home's current value.

"Equity in the home is a significant driver of default," Dubitsky said.

Also, many borrowers are drowning in many types of debt, experts said. So just adjusting their first mortgage, or lien, is not enough. Ocwen, for instance, takes into account all of a borrower's obligations when calculating an affordable monthly payment.

Debt loads beyond the mortgage are a big factor in a borrower's ability to keep up with payments, Schwartz said.

"When you have unexpected medical expenses and a lot of credit card debt, you can have an affordable first lien, but still have someone who's in trouble," she said

The Obama administration kicked off a new program Wednesday that's designed to help up to 9 million borrowers stay in their homes through refinanced mortgages or loans that are modified to lower monthly payments.

Borrowers, however, are being advised to be patient in their efforts to get help because mortgage companies are likely to be flooded with calls.

Government officials, launching the "Making Home Affordable" program also acknowledge that the initiatives are only a partial fix for a sweeping problem that has helped plunge the U.S. economy into the worst recession in decades. In fact, tens of thousands of homeowners in some of the most battered real estate markets - concentrated in California, Florida, Nevada and Arizona - won't be eligible for the two programs.

"It's not intended to prevent every foreclosure or to help every homeowner," a senior Treasury Department official told reporters. "It's really targeted at responsible homeowners."

There was also skepticism that banks would be willing to participate.

"I've just seen so many of the programs not work," said Pava Leyrer, president of Heritage National Mortgage in Randville, Mich. "It gets borrowers hopes up. They call and call for these programs and we can't get anybody to do them."

The Obama administration's program has two parts: one to work with lenders to modify the loan terms for up to 4 million homeowner, the second to refinance up to 5 million homeowners into more affordable fixed-rate loans.

For the modification program, borrowers who are eligible will have to provide their most recent tax return and two pay stubs, as well as an "affidavit of financial hardship" to qualify for the loan modification program, which runs through 2012.

Borrowers are only allowed to have their loans modified once, and the program only applies for loans made on Jan. 1 2009, or earlier. Mortgages for single-family properties that are worth more than $729,750 are excluded.

Lenders could reduce a borrower's interest rate to as low as 2 percent for five years. Rates would then rise to about 5 percent until the mortgage is repaid.

If the plan works as intended, it could be a big plus for borrowers like Nick Kavalary, a network cable installer who lives outside Milwaukee.

Kavalary, 42, has been struggling with JPMorgan Chase & Co. to get a loan modification. He was finally approved for one this year, but it only cuts his interest rate to about 9.8 percent from 10.75 percent. Even at the lower rate, he said, making the payment is nearly impossible.

"If I can't pick up a second job, I'm going to lose this house," he said. "With the job market being the way it is, nobody's hiring nobody."

For the refinance program, only homeowners whose loans are held by Fannie Mae or Freddie Mac are eligible and have until June 2010 to apply.

Consumers should contact their loan servicer - the company that sends out their monthly bill - to find out if their mortgages are held by Fannie or Freddie. The two mortgage finance companies own or guarantee almost 31 million home loans - more than half of all U.S home mortgages.

Many mortgage brokers, however, are critical. They argue the fees imposed by Fannie and Freddie over the past year make it difficult for borrowers to afford to refinance. The two companies, which are now government controlled, have yet to detail how they will implement the plan, or whether any fees will be rolled back.

Meanwhile, action to put in place another part of Obama's housing plan is expected soon on Capitol Hill.

House Democrats agreed Tuesday to narrow proposed legislation that gives bankruptcy judges the power to change the terms of mortgage loans for debt-strapped borrowers.

In the latest version of the bill, judges would have to consider whether a homeowner had been offered a reasonable deal by the bank to rework his or her home loan before seeking help in bankruptcy court. Borrowers also would have a responsibility to prove that they tried to modify their mortgages.

Obama's home loan modification plan is officially known as the Making Home Affordable (MHA) plan. The plan is expected to reach up to 9 million families, so that they can refinance or modify their loans and hold on to their houses during this economic recession. Even if you think you won't qualify, think again. Learning about the requirements for modifying your home loan might surprise you.

The first criteria for modification is that your loan has to be a Fannie Mae or Freddie Mac insured loan. At the present time, only loans by those two organizations are eligible for special refinancing and modifying actions under the MHA plan. You also must be the primary resident of the house in question if you want to refinance or modify your home loan under the plan.

The MHA plan gives homeowners tow separate options. The first avenue is refinancing; the second is modifying their loan. Borrowers who have not yet fallen behind on mortgage payments and owe below 105% of the principal of their loan can take advantages of a special refinance. This is true even if they don't qualify for traditional refinance. It's important to know that only those who are still current on payments can refinance under the MHA act.

If you're having difficulty making ends meet and paying your monthly mortgage premiums, then getting a loan modification with the government-sponsored MHA plan could be for you. People who are current as well as people who have fallen behind on mortgage payments can get loan modifications. As long as you own and occupy the house and have a monthly payment that exceeds 31% of your gross monthly income.

The loan modification plan target at-risk borrowers and adjusts the terms of their mortgages so they will pay below 31% of their gross monthly income. This is called their debt-to-income (DTI) ratio. The first step is for lenders to reduce the interest rate to a floor of 2% to try to meet a 38% DTI. If the interest rates hit the floor and still do not meet the 38% DTI, then further modifications can be made. The lender can extend the loan for up to 40 years, and then they can begin to forbear principal on the loan. After meeting the 38% DTI, lenders and the Treasury will work together in a dollar-per-dollar matching program to bring the rate down to below 31% DTI for borrowers.

After coming to an acceptable modification, borrowers will have three months to prove that the new loan rates are something they can handle. If they keep current for a trial period of three months, the new mortgage terms stay fixed for the next five years. This is the procedure that the MHA plan uses to prevent foreclosures and let millions of U.S. families remain in their houses.

More good news for small businesses that might, while they are still young, see loans available again. I know you've heard this before, but I think it is rolling toward the real thing this time. The U.S. Treasury Department, as part of the Obama stimulus plan, will start loaning money to investors by March 31, 2009, as part of a bank rescue fund. Remember that as of October of 2008, according to the National Small Business Association (NSBA), the secondary market for selling small business loans froze. Now as much as 15 billion of the 700 billion in TARP money will be made available for this secondary market. The NSBA is calling for at least 3 billion of this to purchase SBA 7(a) pooled securities.

As a small business owner you may ask: "What is secondary market and why should I care about it?" Well, you should. After a bank makes a loan, it packages them in pools and sells to investors on the secondary market who purchase at a premium. So if you have $100,000 loan and it is sold at a premium of 115%, the bank gets back $115,000.. With new money into its coffers, it loans to other businesses and the cycle continues over and over again. What happened lately is the secondary market has dried up and so banks aren't loaning. With the reviving of that market, they will hopefully get down to business again.

And not a moment too soon. The SBA guaranteed loans fell 57% in the fourth quarter of 2008, from a year ago. They usually give guarantees of 20 billion a year and looks like they are heading for only 10 billion this year. Also, 48% of major SBA lenders say they have stopped making loans according to a March survey by Terry and Associates, Inc, an executive and SBA and recruiting firm. But the good news is that in the last few days, premium bids on SBA loans exceeded 105% for the first time since September 11, 2008, per govgex.com.

Of course, most of this data relates to big banks. The smaller banks which specialize in SBA loans have been less affected by this economy and are still making loans--now. That's right, there are financial institutions actually making SBA loans as we speak. He just have to find them.

So why are some people so optimistic that small business loan money will be flowing again for start-up businesses as well as existing ones that want to expand? Here are some reasons:

Why Banks Will Start Lending Within the Next Six Months

• Obama's reputation at stake. President Obama has staked his political future on being able to revive the economy, specifically rejuvenating the secondary market. He will not allow maligning of that reputation to occur. This means he and his team will be doing everything they can to breathe life once again into that market.

• The Fed is a money printing machine. We all learned this in civics class. State and local governments actually have bank accounts that have to be balanced with the influx of tax and bond monies. When they run out of money, they can't print U.S. currency. As a vast overstatement, the Federal government can print more money (subject to excessive printing which would cause massive inflation). If it runs out of money through the influx of taxes, it can simply produce more revenue by the selling of treasury bills, notes, bonds, and savings bonds. Since the U.S. public can only buy so much, they can dump these on the international market--which they have been doing for decades. So, the point is, more and more money can be dumped into the secondary market.

• The Federal deficit is an illusion. The Federal government does not balance their affairs like we do our bank accounts. Sure, the U.S. Treasury is limited to the "Debt Subject to Limit" authorized by Congress, but Congress can increase it if they wish. It simply means further generations will have longer to pay it off. That doesn't necessarily mean we all have to dig into our pockets to pay it off now. It simply means that every morning the Federal Bureau of Public Debt accounts for more deficit and "lets it roll for the future". If taxes stay relatively the same, the deficit will simply be with us longer. As of March 19, 2009, the national debt is just over 11 trillion, which equates to $36,121.40 for each American, or $3.8 billion a day (U.S. National Debt Clock; brillig.com). The point? There is nothing stopping the Administration from pumping more money into the economy which will give incentives for banks to make loans.

• The country would rather have more debt than go down the tubes. After talking or meeting with approximately 100 small businesses each day, twelve months out of the year, for seven years, I have rarely seen them as angry as with the bailout money. More accurately phrased, they are imbued with an almost seething anger approaching a "calling to arms" revolutionary mentality. I agree with them. But nothing to date has stopped Congress from continuing with the bailout which I suspect will be with us for the indefinite future.

The banker's mentality: "Wait and See-Come to Me". Bankers are obsessively conservative. They don't drive markets, the market's drive them. When the housing market exploded with new construction, refinance, and home improvement, they reacted by jumping on the bandwagon. They didn't create it. When the secondary market heats up, they will join the same parade. Especially if a competitor bank across the street is doing so. Further, banks can only make so much money with their deposits, ATM charges, and overdraft service fees. They eventually have to get back in the market of making loans which is their real bread and butter.

• Capital always find its market. There is still trillions of capital waiting to find a home in America. The Federal Reserve of New York is now making available low interest loans to investors purchasing pools of secondary market business loans. The money will be rushing in along with good old an fashioned American desire for profit. You can only hold back capital infusion for so long.

So keep your chin up kid. Capital will be coming your way. If you can just stay in a survival mode for the next few months, you'll be able to launch that new advertising campaign and hire a new sales rep. Really.

As Americans we have experienced the full gamut of emotions after hearing TARP I handed 350 billion to big banks, but no money filtered through to small businesses in the form of loans. In fact, the spicket was turned off completely after receipt of the bailout money. But putting down the front page of our local newspaper for a moment, what is it like in the trenches? Are the banks really denying capital to businesses across the nation? And how are they treating them in this crisis. You'll be saddened to hear it is every bit as foreboding as you have heard, or even worse.

Mrs. Smith is the classic poster child of female entrepreneurial success. Starting as an everyday real estate agent, over the last 24 years, she has built an amazing corporate edifice consisting of several real estate sales branch offices and now employs 170 people. Her thriving business came as the result of untold hours of toil in which she describes herself as a "serial workaholic". As a result, she is considered one of most productive real estate offices in the state. Over the years, she had a strong relationship with a big bank and took out eight loans and lines of credit. All had been payback and were never late a single day. Her credit score is excellent and reports no negatives. Needless to say, as most businesses, she relies upon the line of credit to put her over the hump during times of lower cash flow. What happened next could not have been conjured up in your worst nightmare.

One afternoon on January 30, 2009, she received a call from her bank. In the past, she looked forward to receiving these calls because they were so energized and cooperative. They made her feel special. Her credit rating was so good, that twice she merely called up the bank manager, speaking to him by his first name, and was able to extend the line of credit by a simple verbal request. In those days, the conversations were something like: "Hello Mrs. Smith. I trust everything has been good with your business and family. How is your son John enjoying the college life? Sure--we'll be delighted to extend your credit line again and I will have one of my associates prepare the paperwork and get it over to you as soon as possible. Look to speaking with you soon." Today was different. Her CPA was in the office that afternoon picking up profit and loss sheets when the call came in. It was not the manager. It was someone at the bank she had never met.

"Is this Mrs. Smith? I am Frank Thompson with ABC Bank." He began with a twang that could only be described as consummate arrogance.

"Well hello. How are you today?" Mrs. Smith said cheerfully.

"Fine. Mrs. Smith, I assume you're busy so let me come right to the point. We have reviewed your loan accounts and effective immediately I am notifying you that they are being called and are now due and payable." It came to her in words that were abrupt and stinging. Although her heart skipped a beat, her first reaction was they must be calling the wrong person. She immediately motioned her CPA to get on the line.

"Hi. This is Mr. Evans, Mr. Smith's CPA. Would you be so kind as to repeat what you just told Mrs. Smith?"

Mr. Thompson was clearly agitated in having to repeat himself: "I'm really not accustomed to having to repeat myself, but I will tell you again. Mrs. Smith's $200,000 line of credit is canceled effective immediately and all sums are due and payable. Do I make myself clear?

"I'm sorry, we don't understand. Is there a problem with the account? To my knowledge Mrs. Smith has always paid her monthly installments on time and his current as we speak."

To say Mr. Thompson was rude was an understatement. Now he became even more bothered by the conversation: "It's clear you don't understand. I would suggest that you read the clear language of the loan agreement that gives us the option of doing so at any time with two weeks notice. I am giving you this notice now. Having said this in very simple language, I assume you have the basic intelligence to understand what I just said."

"Sorry, but we're just trying to be able to digest this news. This is very serious. We can't just pull out our checkbooks and a make a full payment on one day's notice . You don't have to be rude to us." Although still in shock, Mrs. Smith tried your best to soften the conversation.

Mr. Thompson was now eager to end the conversation. "Let me make it even clearer. Based on what I just told you, our bank no longer has a business relationship with you. You would be well advised to take steps to pay this account so that legal action is not necessary."

"Please understand that we need some time to think this through . . . I should . . . I mean I need to get a hold of the manager first," she pleaded.

"I'm handling the account now. You are not to talk to anyone else but me." The tone of of his voice was unmistakable and threatening.

At that point the conversation went steadily downhill. She and her CPA spent the rest of the day going over the books and speaking with their attorney.

Sound like something that cannot happen in America to a successful small business? Well, think again. These are exact quotes of the conversation. The big bank is simply stomping out big small businesses to improve their balance sheets. The lifesaver that has thrown to the big banks in the hopes they would pass it to small businesses on Main Street has simply not happened. It is at least understandable if a large bank decides not to make a new loan in this challenge economy. But it's another thing altogether to cancel existing loans with good customers.

Is this an isolated occurrence? Not all. Here is another example. Robert Picou is the President of the California manufacturing company known as California Ribbon and Carbon Co., Inc., with a plant located in Los Angeles. Robert is the epitome of the seasoned business owner, knowledgeable, practical, optimistic, and understandably proud of his company's heritage. After talking to him, you get the uncontrolled urge to get in the car and drive out to his plant. You get the image of a certain industrial vibrancy which is missing in America.

He should be proud. It is a story right out of the movies. In 1939, his father started selling old fashioned manual typewriter ribbons door to door to business owners in the Los Angeles area. But unlike Willy Loman in "Death of a Salesman", he made it into a real success. 70 years later this closely held family corporation has continued to thrive. To manage the ruts along the way, twenty years ago he took out a business credit card with a well known company and secured a large credit line. Needless to say, he has paid it on time ever since. But then he got a sudden and unexpected surprise in the mail. The credit card company unilaterally cut his credit line and froze up this access to working capital.

He wasn't especially daunted by this news because after all, he had a longstanding relationship with his large bank. All we needed to do was call them up and ask for an extension of his line of credit. His bank did get $150,000,000 in TARP money to presumably free up the money. Ten years ago he owed them as much as $1.4 million, but because of the success of his business, was able to pay it down to $88,000. A perfect candidate to receive some of the bailout monies and create an even more positive cash flow for him and the neighboring economy. No problem, right? Wrong again.

With no explanation, his bank turned him down flat. Asking why, he has yet to receive a credible answer. With orders piling in, his company is now on the unenviable position of not being able to fund all the orders received. Not to mention the rippling effect it has on his suppliers and employees, all of which have a tangible stake in our troubled economy.

It is apparent that large banks have no intention whatsoever of using bailout monies for the benefit of small businesses. So is anyone out there actually loaning money in good faith? Now the good news. Smaller financial to institutions and community banks are interested in your business through the vehicle know as an SBA guaranteed loan. They are not only out there, but wisely taking over a niche ignored by the larger banks. These institutions are using the incentives given by the SBA guarantee to cut their risk of loss and build up a better portfolio to be sold on the secondary market. You just have to find the right bank. At least someone realizes the foundational strength small businesses give to the overall economy.