Some Highlights
On Wednesday President Obama unveiled his plan for the distressed homeowners and the troubled housing market. Final details of the plan will be worked out by March 4th. Called the Homeowner Affordability and Stability Plan, it will apply ONLY to primary residences, and will apply to mortgages that do NOT exceed Freddie conforming loan limits. This is a brief summary of the three main parts to the plan.
Mortgage Refininacing Assistance
This change is intended to assist homeowners obtain lowered mortgage payments by refinancing at today’s lower rates. Homeowners who have a conforming loans owned or guaranteed by Freddie Mac and Fannie Mae will be allowed to refinance their homes even if they do not have 20 percent equity in their home. The U.S. Treasury Dept. estimates that this change will allow nearly 5 million homeowners to refinance into loans with lower rates.
Limitations:
- Doesn’t cover jumbo loans, which many San Diego homeowners DO have, because of the high cost of homes in this area.
- Doesn’t cover loans which are not owned or guaranteed by Fannie Mae or Freddie Mac, which is roughly half of all loans.
- The mortgaged amount may not exceed 105% of the current value of the property. For San Diego homeowners who purchased homes near the market peak with little or no money down, this limitation may prevent them from refinancing under this plan. Some areas in San Diego County have experienced price declines so severe that their mortgaged amounts are well over this limit.
Incentives for Mortgage Modification Assistance
The plan calls for a government subsidy for banks which voluntarily modify mortgages according to specific guidelines which will be finalized in early March. The plan will call for for primary (first) mortgages to be reduced so that monthly payments that do not exceed a 38% debt-to-income ratio. (The cost is to be bourne by the lender.) Total mortgage payments will be reduced to a 31% debt to income ratio. (This cost is to be split by government and lender.) There will be incentives to bank servicers and to homeowners for each modification. Homeowners do not have to be delinquent to participate in the program. The U.S. Treasury Dept. estimates that these changes may enable up to 4 million homeowners to obtain mortgage modifications.
Limitations:
- The program is voluntary for lenders who are not receiving government funds, and past voluntary modification programs have met with limited success.
- The motivation for banks to engage in the voluntary modification of mortgages may depend on a provision allowing bankruptcy judges to require loan modification (commonly called a cramdown). That provision will require legislation by Congress.
- How or whether the program will address second mortgages was not addressed. Second mortgages make the mortgage modification process more difficult.
Strengthen Fannie Mae and Freddie Mac
The intent is to make the purchase of Fannie Mae and Freddie Mac mortgage-backed securities more attractive to investors. The purchase of these securities increases mortgage availability and lowers interest rates, so the Treasurey Dept will purchase an additional $50 billion of Fannie Mae and Freddie Mac backed-securities, which increases their holdings to $900 billion. The Treasury Dept. will also double their Preferred Stock holdings to $200 billion for each entity.
References
Homeowner Affordability and Stability Plan
Obama Proposes Package To Stave Off Foreclosures - Washington Post
President Obama’s Remarks on the Homeowner Affordability and Stability Plan - New York Times
Tags: fannie mae, foreclosure relief, freddie mac, loan modification, mortgage modification