Thursday, March 5, 2009

Details on Fed Home Plan

Last week, the Federal Government discussed its “Homeowner Affordability and Stability Plan,” and I wrote about how Alameda residents would not see much relief from this plan because of loan limits. It appears that the government saw the flaw in the plan and increased the dollar amount; now home owners with mortgages as high as $729,750 could qualify for help.

The other key element there is no income ceiling homeowner just needs to be in danger of losing their homes. The program is open only to borrowers who live in the homes at issue, and not to investors or people with mortgages on second or third homes. It is open to people who obtained a mortgage before Jan. 1, 2009. Borrowers can apply for loan modifications until the end of 2012.

The plan that was unveiled yesterday, allows for interest rates on loans to drop as low as 2 percent and many homeowners could see their mortgage payments drop by several hundred dollars a month or in some specific case up to a $1,000 a month.

Struggling homeowners also will have to leap several hurdles to be eligible to a new loan under the “Making Home Affordable” initiative. The program runs through 2012.

Borrowers are only allowed to have their loans modified once, and the program only applies to first-lien loans made Jan. 1, 2009, or earlier. Up to 4 million borrowers are expected to qualify.  Another 5 million borrowers who have mortgages held by government-controlled mortgage finance giants Fannie Mae and Freddie Mac should be eligible to refinance through June 2010. 

The Treasury still has several key details to work out with the banks. The biggest involves how to handle the millions of homeowners with second mortgages or home equity loans are handled during modification. Because a holder of second liens typically incurs bigger losses when primary mortgages are modified and winning their approval has to be negotiated.

The enthusiasm with which lenders agree to modify loans is likely to be affected by a bill that would give bankruptcy judges the power to order changes in mortgages on primary residences and would protect loan-servicing companies from lawsuits by investors.

The nation’s biggest mortgage-servicing companies, overseeing two-thirds of all home loans in the country — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo & Co. are expected to participate in the plan.

This plan will not help every homeowner in trouble and according to several articles will do little to help families where one or more breadwinners have lost their jobs. People flooded with debt beyond their mortgages will also see little relief from this plan and those homeowners who are current on their loans but “upside down” — owing more than their houses are worth.

A person will receive help based on so-called net present value calculation by the mortgage company. A lender will calculate how much it would cost to reduce a person’s monthly payments to 31 to 38 percent of the borrower’s monthly income. If the calculation shows that the lender’s cost in modifying the loan, after receiving the taxpayer subsidy, would be lower than the cost of foreclosing, the lender would be required to offer a borrower the new deal. If the estimated cost of the concessions appeared to be higher than the cost of foreclosure, the decision would be voluntary.

So the simple explanation is if it will cost the Bank more to foreclose than modify you will see the lenders move this direction. I still think that with all the exclusions it will be difficult for Alameda homeowners to qualify. Most Americans have a second or line of equity and we will see how much latitude will be given with these type of loans.


SF Gate has a great Q&A to see if you qualify

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