Update on the Homeowner Affordability & Stability Plan

The Making Home Affordable plan is part of President Obama’s strategy to get the economy and housing market back on track. It is estimated that this plan could help up to 9  million homeowners avoid foreclosure. On March 4, 2009 the Treasury Department released detailed guidelines of the plan. I am summarizing what I think are the key components from the Treasury Department’s website. For more information, click on the following links:

Making Home Affordable Q&A

Making Home Affordable Fact Sheet

Making Home Affordable Summary

 Eligibility Self Asssessment Tool

 

The 3 main elements of the plan include:

1. Home Affordable Refinance Program – Under this program eligible borrowers may refinance loans that the GSEs (Fannie & Freddie) own or guarantee, which amounts to about half of all outstanding mortgages. Currently the refinance option is only available for conforming loans owned or securitized by Fannie Mae and Freddie Mac. The owner must be current on their mortgage payments, the property must be owner occupied, the borrower must have sufficient income to support the new mortgage debt, and the first mortgage may not exceed 105% of the current market value of the property. For example if the property is worth $200,000, the borrower must owe $210,000 or less on their first mortgage.  If you also have a second mortgage and your total debt exceeds 105% of the current market value, you may still be eligible for a refinance on your first mortgage if the second mortgage holder agrees to remain subordinate to the new first mortgage.

To find out if your loan is owned by Fannie or Freddie, you can call these numbers or visit these websites:

For Fannie Mae: 1-800-7FANNIE (8am to 8pm EST) www.fanniemae.com/homeaffordable

For Freddie Mac: 1-800-FREDDIE (8am to 8pm EST) www.freddiemac.com/avoidforeclosure

2. Home Affordable Modification Program – This $75 billion program provides loan modifications at no cost to borrowers who are at risk of default or already in default, and are experiencing a hardship. Loans eligible for the modification program include most conventional loans: prime, subprime, adjustable, loans owned by lenders and loans in securities. The borrower must be an owner-occupant in a one to four unit property, have an unpaid principal balance that is equal to or less than $729,750 (for one unit properties and higher for two to four unit properties) a loan that was originated before January 1, 2009, a mortgage payment (including taxes, insurance, and homeowners association dues) that is more than 31% of the borrowers’ gross monthly income, and have experienced a significant change in income or expenses, to the point that the current mortgage payment is no longer affordable.

In most cases, the modification will be accomplished by an interest rate reduction to as low as 2% if necessary. One of the goals is to get the borrower’s debt to income (DTI) ratio down to 31%. Borrowers will get a three month trial modification and if they remain current on their payments after the trial period, their loan servicer will execute a modification agreement. If the modified interest rate you are given is below the current market rate, your rate will be fixed for a minimum of 5 years. On the 6th year, your rate may increase no more than 1 percentage point per year until the rate reaches a cap equal to the market interest rate on the date the modification is finalized. 

In certain cases, a rate reduction might not be enough to get the borrowers DTI ratio down to 31%. In those cases, the loan servicer can extend the amortization period (i.e. a 40 year loan term rather than a 30 year loan term). If that still doesn’t do the trick, the lender must forbear principal. In this situation, you can certainly expect a ballon payment in the amount that was deferred when you sell the house, pay off the loan, or refinance in the future.

 

3. Supporting Low Mortgage Rates by Strengthening Confidence in Fannie Mae and Freddie Mac – in other words, we’re giving Fannie and Freddie more money. The goal of this portion of the plan is to provide liquidity, stability and affordability to the housing market.

 

There is a lot of great information available about these refinance and modification plans and I have only provided a summary. Please do your homework and if you think you might qualify, start gathering the information your lender will need to make a determination about your eligibility. Call your lender and ask about the Home Affordable program.

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