About Loan Modification: Obama Foreclosure Rescue Solution
There has been a lot of news coming out of Washington lately. Thats why I am going to attempt to briefly explain the highlights of President Obamas plan to reduce foreclosures. It is estimated (by the government) that this plan will help up to 9 million homeowners. According to the Mortgage Bankers Association, there are about 51 million first mortgages in the United States which means about 18% of the total might qualify. On March 4, 2009 we finally were given the details everyone has been waiting to hear. Please keep in mind that this is just a summary and that there are additional details. You can learn more about the plan by going to the US Government website: financialstability.gov.
The sharp increase in foreclosures is a very serious problem and the new acronyms applied are most annoying. In addition to one of the newest ones, MHA (Making Home Affordable), are the many other acronyms the government uses, including TARP, TALF, H4H, GSE, FNMA, FLHMC, PITI, FHA, VA, USDA, etcThis is overwhelming, even to real estate and finance professionals.
There are basically two parts to the new rescue program, acronyms, of course! HAR stands for Home Affordable Refinance and HAM stands for Home Affordable Modification. The purpose of these two programs, respectively, is to refinance eligible mortgages and to provide mortgage modifications
Lets review the HAR Program:
The current mortgage must be insured by either Fannie Mae (FNMA) or Freddie Mac (FLHMC). To find out if your mortgage meets this requirement, call (800) 7FANNIE or (800) 7FREDDIE between 8:00am and 8:00pm, Eastern Standard Time. The home in question must be your primary residence, not a second home or investment property. The homeowners income must be sufficient to qualify for this program. Payments must be current, with no payments being 30 days late during the last year. The amount of the first mortgage cannot be over 105% of the homes current market value; therefore, if the property is worth $100,000, the most that can be owed is $105,000. If there are other liens, like a second mortgage or equity line of credit, lien holders must be willing to subordinate, in writing, to the first lien holder. This means the first mortgage holder will retain their superior position. The total owed can exceed 105% of the homes value; however, the refinance of the first mortgage cannot exceed this amount. This program was launched on March 4, 2009.
Now for the HAM Program:
To be eligible for loan modification, the lender must be willing to participate; Investor/Lender or servicer participation is completely voluntary. This program was designed to help avoid foreclosure if possible. Individual cases are evaluated and borrowers must show a steady source of income to prove that they can afford a modified payment. The current mortgage terms must result in documented financial hardship in order to qualify. The total current monthly payment, including taxes and insurance, must exceed 31% of the borrowers gross monthly income. This amount is referred to as PITI (Principle, Interest, Taxes and Insurance); yes, another acronym. It is not necessary for the borrowers to be current on their mortgage payments. Every situation is unique and will be evaluated on a case-by-case basis. The purpose of this plan is to reduce the financial hardship with a lower PITI payment to 31% or less of ones gross monthly income. This includes second mortgages and home equity lines of credit where lien holders are willing to participate and subordinate their liens to the new modified mortgage. The mortgage must be for a primary residence; second homes and investment properties do not qualify for this program. Subject mortgage must have been made prior to January, 2009 and cannot exceed $729,750. Though Im sure theres a reason for this being the maximum, I havent found any information supporting this amount. The reduced payment amount is achieved with a lower interest rate, an extension of the maturity date, or, as a last resort, a reduction of the principle balance owed. Realize that cooperation is voluntary and left up to the lender/servicer/investor holding the mortgage. Modification terms are for a 90 day trial period and then extended for a term of no less than 5 years, provided that the borrower is able to honor the terms during the 90 day trial period. At the beginning of the 6th year, the interest rate can be increased. Guidelines allow no more than 1% per year increase until the note reaches the Freddie Mac primary Mortgage Market Survey Rate on the date the modification is executed.
This is a brief summary, highlighting the terms and conditions of these new programs. For more information, you can visit the website at financialstabiltiy.gov.
Lets all hope that this new initiative is more successful than the Hope for Homeowners Program (H4H) that started October 1, 2008. The following article was published recently by Time Magazine:
Grade: F The Plan: Enacted on Oct. 1, Hope for Homeowners was to be the main foreclosure rescue plan from Congress, which allocated $300 billion for the effort. Supporters in Congress, like Massachusetts Representative Barney Frank, said the program would allow hundreds of thousands of borrowers, perhaps millions, to refinance into lower-cost loans by cutting the amount they owed, which for many at-risk-of-default homeowners was more than their house was worth.
The Result: So how many people have Hope for Homeowners saved from foreclosure? Zero. There have been 326 applications in the three months since the program started, but none of those people ” let alone the nearly 6 million homeowners who, by some estimates, may face foreclosure in the next few years ” have received a new mortgage or a modification for the one they have. What’s more, none of the major mortgage lenders, such as Bank of America, Citigroup and Wells Fargo, has signed on to the loan-principal-reduction program ” which gives Hope for Homeowners little chance of being successful anytime soon. “Foreclosure is the problem we have to spend a lot more effort trying to solve,” says the Economic Policy Institute’s Robert Scott. “We need to put a floor under housing prices, and stopping foreclosures is the way you do that.”
Please keep in mind that this is my understanding of the guidelines and that all information should be independently verified. Finally,…please remember…since this is a government program, all rules and guidelines are subject to change. Stay tuned…….