If you’re straining to pay your mortgage, you may find help in the fine print of the plan President Obama issued last week to reduce the pace of foreclosures, especially if you live in a region of the country where home prices are highest.
The government estimates that the initiative, called Making Home Affordable Refinance and Modification Options, could help up to 9 million households in danger of losing their houses. Already, nearly 2,900 Americans are in foreclosure every day, according to a congressional oversight panel.
The new plan may help reduce monthly payments if a mortgage is as much as $729,750—nearly 75 percent higher than the $419,900 ceiling of the foreclosure relief plan announced last month. That increase should make a big difference for struggling homeowners living in states like California, Florida and New Jersey, where home values skyrocketed during the housing boom and now have fallen drastically.
“This new $729,000 level will definitely help some people” who would not have been eligible before, said Martin Eichner, director of HUD (Department of Housing and Urban Development) counseling programs for Project Sentinel, a nonprofit housing center in California’s Silicon Valley that helps distressed homeowners.
Two Options: Refinancing or loan modification
The new plan is expected to be most helpful to those who have difficulty making their monthly payments but are not yet so far behind that foreclosure seems imminent. It offers two different programs: The first, a program to refinance mortgages, is available only to those whose mortgages are government-insured. The second, a loan modification plan, is available to homeowners whose mortgages are held by private financial institutions and are not federally insured.
The refinancing plan:This is for homeowners whose mortgages are already guaranteed by Fannie Mae or Freddie Mac, the government-controlled agencies that finance the bulk of new home loans now. Under this program, the government will actually rewrite a mortgage, offering the homeowner a lower-cost, fixed-rate loan to replace a higher-cost, adjustable-rate mortgage.
Refinancing is available only if the balance of the mortgage is no more than 105 percent of the current market value of the property. So, for instance, if you owe a $200,000 balance on a property now estimated to be worth only $190,000, you could still qualify. However, you will not be able to refinance if you are already delinquent on your house payments. The government estimates that 4 million to 5 million homeowners who are currently on time with their payments could qualify for refinancing under the new plan.
Loan modification:If your home loan is not guaranteed by Freddie or Fannie, you could still qualify for a loan modification, even if you are delinquent on your current loan. The government is setting aside $75 billion that will help pay for loan modifications by offering banks and loan servicers financial incentives to rewrite existing mortgages (to adjust the interest rate or the duration of the loans they hold). The government estimates another 3 million to 4 million homeowners could be helped by this program.
You can qualify for a loan modification if you don’t owe more than $729,750 on your first loan. You will have to document your income, show pay stubs and recent tax returns, and sign an affidavit declaring that you suffer from financial hardship. Using a set formula, the mortgage holder will calculate whether it is likely to receive a higher cash return under loan modification than it would if the house went into foreclosure. If the loan modification yields a higher return, the mortgage will be modified.
The 31 percent goal
The intent of loan modification is to ultimately lower a homeowner’s monthly payment to no more than 31 percent of total income, which is considered a benchmark of affordability.
Here’s an example of how this might work:
Let’s assume that you are struggling to pay the bank $2,000 each month for an adjustable-rate home mortgage but earn $4,000 of monthly income, so housing eats up 50 percent of your earnings. Under provisions of the new plan, if the bank agrees to lower your monthly bill to 38 percent of monthly income, or $1,520, the government will match, dollar for dollar, the subsequent reductions that ultimately lower your monthly cost to $1,240, or the 31 percent target. The bank can get to this level by reducing the mortgage rate to as low as 2 percent, extending the term of the loan to up to 40 years or reducing the principal.
In exchange for lowering your mortgage by $760 each month, the mortgage holder gets extra incentives—a one-time fee of $1,500 per loan from the government and $1,000 a year for up to five years that you keep paying your mortgage promptly. You will also see $1,000 knocked off your principal every year for five years if you continue to pay on time. If you are on the verge of foreclosure, you can even have the proceeding suspended while you try to get your loan rewritten.
If your total outstanding debts on mortgages, credit cards and auto loans exceed 55 percent of your income, you will also have to receive formal credit counseling to be eligible for the modification.
Who won’t be helped
While housing advocates say the program might well reduce the next wave of defaults, they worry it will do little good for the thousands of families already facing default. If you’re not yet facing foreclosure, “this program is fine,” said Mark Seifert, executive director of Empowering and Strengthening Ohio’s People, a housing counseling program headquartered in Cleveland. “There’s no question that a 31 percent figure is very affordable and would help many more people.
“But, my God, we have 4 million people in foreclosure” across the country, he added. “This program’s not going to help them.”
Nor will the new Obama plan help the homeowner with huge “negative equity”—who, say, owes $800,000 on a house now only worth $650,000. More than 8.3 million U.S. mortgage holders are now “under water” (they owe more on their loans than their properties are worth), according to data released last week by First American CoreLogic. An average of 230,000 borrowers a month slipped under water in the fourth quarter of 2008, First American said. California led with 43,000, followed by Texas with 16,000, Nevada with 15,000, and Florida and Virginia, each with 14,000.
The lack of clear solutions for these homeowners worries Jay Butler, who is the director of realty studies at Arizona State University Polytechnic campus. “A lot of people in this state are deeply under water,” he said. While some of these homeowners might now be eligible for a loan modification under the new Obama plan, the gap between their outstanding balances and the plummeting value of their property is unlikely to narrow in the near future.
“You can lower these people’s payments now,” he said, “but in a year or two they’ll still be owing a lot more than the house is worth.”
Michael Zielenziger writes on business and the economy.
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