Obama Foreclosure Rescue: Refinance and Modification
Perhaps you have read some of the many reports from Washington, including the one about President Obamas foreclosure rescue programs. The information can be overwhelming, which is why I am writing this article in hopes of minimizing the confusion by explaining the highlights as I understand them. It has been estimated by the government that Obamas plan will help up to 9 million people who are facing foreclosure. Though this may sound like a lot, realize that the Mortgage Bankers Association reports that there are about 51 million first mortgages in the US; therefore, only about 18% will qualify for this program which began in March of 2009. Following is a summary of a complex program; more information can be found at financialstability.gov, a US Government website.
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 essentially two parts to the program, which, in time, will be known as HAR (Home Affordable Refinance) and the HAM (Home Affordable Modification). The purpose of the HAR program is to help eligible homeowners refinance their mortgage. The HAM deals with 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:
Investor/Lender participation is optional and voluntary; your mortgage servicer must be willing to participate in a modification program. The purpose of this program is to avoid foreclosure whenever possible; each case is analyzed and evaluated to determine if the borrower has sufficient income to afford a modified mortgage payment. The current PITI (Principle, Interest, Taxes and Insurance) must exceed 31% of the borrower(s) gross monthly income. Thats right, another acronym! Borrowers can be behind on their mortgage payments as each individual case is analyzed and evaluated. The plan is intended to reduce the current PITI payment for all mortgages to an amount of 31% or less than the borrower(s) monthly gross income. This includes all liens and lien holders must be willing to subordinate their position to the new modified mortgage. The modified mortgage must be for your primary residence, second homes and investment properties do not qualify. The mortgage must have been executed before January 1, 2009 and the amount owed cannot be more than $729,750. Im sure there is a reason why this is the maximum; however, I have not found any information as to how the government came to this amount. The reduced payment is a result of either a lower interest rate, a longer mortgage term, or, as a last resort, a reduced principle balance. Remember, lender/servicer cooperation is both required and voluntary. There is a 90 day trial period for the modified mortgage where the borrower must honor all the terms, and then the modification is extended for a period of no less than 5 years. Starting in year 6, the interest rate can be increased by no more than 1% per year, until the rate reaches the Freddie Mac Primary Mortgage Survey Rate on the date the modification is executed.
This article was intended to be a brief general summary of the highlights; there are additional terms and conditions that can be found at financialstability.gov
I sincerely hope these new rescue programs prove to be more successful than the H4H (Hope for Homeowners Program) initiated in October of 2008, as described in the following article published 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.”
Keep in mind that this article is my understanding of the new programs; all information should be independently verified. This is a government program; therefore, subject to modification. Research and educate yourself.
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