This article on Obama’s new stimulus plan was just posted on CNNMoney.com and I think it’s safe to say it should be recommended reading for everyone.
Here are the important excerpts (edited for brevity):
Falling home prices
The administration, which is marketing its plan as help for “responsible homeowners,” estimates it can help up to 5 million people.
The plan would help borrowers who owe more than 80% of their home’s value to refinance and reduce their monthly payments. Lenders generally won’t refinance people who have less than 20% equity in their homes.
But only those who are current on their payments and whose loans are held or guaranteed by Fannie Mae and Freddie Mac are eligible. Also, the new mortgage, including refinancing costs, can’t exceed 105% of the current market value of the property, excluding many of the hardest hit. So if your mortgage is $210,000, your property can’t be worth less than $200,000.
The program, which begins March 4, allows borrowers to refinance into 15-year or 30-year fixed-rate mortgages at the current market rate, which hovers around 5%. This could benefit those whose mortgages carry higher rates or those in adjustable-rate or interest-only loans, groups of people who could see big rate spikes in the future. The plan, however, will not reduce the loan balance.
For instance, consider a family that took out a $207,000 mortgage at 6.5% on a home originally worth $260,000, but now valued at $221,000. If they refinance to a rate of 5.16%, they could reduce their annual payments by more than $2,300.
Homeowner stability initiative
The administration is also creating a $75 billion initiative to reduce monthly payments for at-risk borrowers by subsidizing interest rates. The goal would be to bring payments to no more than 31% of a borrower’s income.
It estimates this program, dubbed the Homeowner Stability Initiative, would help up to 4 million people. It also argues that the measure helps stabilize home prices for all in the neighborhood, maintaining as much as $6,000 in value.
The effort would help borrowers — both those current and delinquent — who live in their homes lower their monthly payments for five years. The servicer would reduce interest rates so that the monthly obligation is no more than 38% of a borrower’s income and then the government would kick in money to bring payments down to 31% of the homeowner’s income.
Servicers can also reduce the loan balance to achieve these affordability levels. The government will share in the cost, up to the amount the servicer would have received if it had reduced the interest rates.
Obama’s plan also addresses critics who say that some homeowners need extra help because they are carrying so much debt on top of their mortgages. Those with total debt — including credit cards and auto loans — equal to 55% of their monthly income must enter a debt counseling program to qualify for a modification.
In addition to providing incentives to servicers and investors, the administration will also reduce borrowers’ loan balances by up to $1,000 a year for five years if they keep up with payments.
To entice servicers to modify mortgages in the wake of continuing home price declines, the administration and the Federal Deposit Insurance Corp. have developed a $10 billion insurance fund that will pay mortgage holders additional funds based on declines in a home price index.
Attached are copies of three documents released by the White House regarding the new “foreclosure plan” announced today.
- The first document is a detailed summary of the provisions outlined by the administration today.
- The second document describes how the plan will help 3 different “families” facing foreclosure.
- The third document is a question and answer series.
This information also is available on REALTOR.org
The one group who does not benefit at all from this stimulus plan are those homeowners who have investment properties, vacation homes, or other-than-primary-residence properties that would otherwise qualify.
So what does this mean? It sounds like substantial help is on the way for millions of homeowners. Politics asides this should definitely provide relief to many homeowners who would otherwise face foreclosure or bankruptcy.
I am curious to see how many lenders/servicers/banks find these programs attractive enough to actually perform loan modifications and I suppose it will become clear during the coming weeks as details of the program are more fully understood.
The Hope For Homeowners Initiative (H4H) really fell flat on it’s face and was another example of a plan that sounded good in theory but that never panned out.
Let’s hope these ideas don’t have the same fate.
Michael Krotchie
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