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Thursday, March 5, 2009

President Obama's Housing Plan: What You Need to Know

Here is a great article on The Obama Housing Plan: What You Need to Know.

Source: Tara Siegel Bernard, N.Y. Times

You’ve probably heard about the Obama administration’s plan to help millions of homeowners refinance or modify their mortgages. This column is meant to answer some of your questions on whether you qualify.

The Treasury Department released the broad outlines of its plan last month, but on Wednesday provided more details about how the plan will work.

The plan’s first prong may help up to five million homeowners who have been unable to refinance their mortgage because the value of their home has plunged and they now owe more than 80 percent of their home’s value. To get a new mortgage, borrowers had to either bring extra cash to the table to get back to 80 percent, or purchase private mortgage insurance, which has become more difficult to qualify for and often quite expensive.

The second part of the plan may help up to three to four million borrowers modify their loans. These borrowers can no longer afford their monthly payments and are close to defaulting, while others are on the brink of foreclosure.

The administration’s “Making Home Affordable” program offers mortgage providers with financial incentives to help these two groups, but to qualify, you need to meet certain requirements.


Q. Who is eligible?

A. The plan is only going to help those who earn enough money to pay their modified loans. So the newly jobless may not get any relief. Nor will people who overextended themselves to such a degree that there’s no hope they’ll ever repay their loans.

To qualify, your monthly housing payment needs to exceed more than 31 percent of your gross monthly income (that means before any payroll deductions are made). Keep in mind that your “payment” includes more than just your mortgage’s principal and interest. It also includes real estate taxes, all related home and flood insurance, as well as home association and condominium fees. It does not include any second mortgages or other loans outstanding.

If your total debts, including your mortgage and any other revolving debt like credit cards, auto payments or student loans, are 55 percent or more of your gross income, you’ll need to work with a counselor who has been approved by the Department of Housing and Urban Development. The modification will not take place until you sign an affidavit promising you’ll get counseling.

The program applies to loans taken out before Jan. 1, 2009, but modifications can be performed now through Dec. 31, 2012. You’ll only have one shot to modify your loan under the program. But people who have already modified their mortgages are still eligible, as long as they meet all of the other requirements.

Lastly, you must also live in the home; real estate investors are not eligible.

Q. Are there any restrictions?

A. Your loan amount must not exceed current Fannie Mae or Freddie Mac loan limits, which are $417,000 in most parts of the country, but up to $729,750 in higher-cost areas like New York and California. That means many people with mortgages above those limits — jumbo loans — will not receive help. Higher limits are allowed for owner-occupied properties with two to four units.

You also need to demonstrate financial hardship. That means you do not have enough liquid assets to pay your mortgage at its existing level. Your retirement assets are not included in that equation.

Q. Do I need to be behind on my payments?

A. No. If you can illustrate that your income is no longer enough to meet your mortgage payment — because your paycheck shrunk, your expenses rose or your mortgage is about to reset to a higher payment — you may qualify.

Q. Does my lender need to participate?

A. The program is expected to be widely adopted by the mortgage industry. Several of the nation’s largest mortgage servicers, including Wells Fargo, Bank of America, J.P. Morgan and Citigroup, have indicated that they would participate in the program. And if a bank receives additional bailout money, it is required to take part. But that doesn’t necessarily mean all participants are required to modify your loan.

What they must do, however, is examine all loans at risk of default or those at least 60 days overdue. The mortgage servicer is required to perform a calculation that will determine whether it will cost more to foreclose or to modify the loan (the servicer, lender or other owner of the loan will receive a financial incentive to modify). If the calculation shows that the modification will cost less, the lender must go ahead and modify the loan.

There may be cases where a modification is not possible. Loans that have been packaged into a security, for example, and sold to an investor that is not owned or backed by a government-sponsored entity like Fannie Mae may fall into this category. About 17 percent of mortgages fit in this category, according to Inside Mortgage Finance.

If the calculation finds that foreclosure is the most economical option, the lender must try and avert foreclosure through other means. That may be through another modification program or pursuing what’s known as a short sale (when you sell the home for less than the mortgage amount and the lender forgives the difference) or a deed-in-lieu (when the borrower gives the home back to the lender without going through a foreclosure, and thus does less damage to their credit score).

Q. How will it work?

A. Your loan servicer needs to follow a series of steps to get your monthly payments to no more than 31 percent of gross monthly income. The servicer will attempt to hit this number by first reducing your interest rate to as low as 2 percent. It then has the option of extending the term of your loan by up to 40 years and deferring principal, in that order.

The interest rate reduction will remain in effect for five years. After that, your rate will gradually increase — by one percentage point each year — to the Freddie Mac Primary Mortgage Market survey rate at the time of your loan. That rate on a 30-year fixed-rate mortgage is currently 5.15 percent.

Q. What do I need to do to apply?

A. Call the company that services your mortgage.


You can also contact Fannie Mae at 1-800-7FANNIE and Freddie Mac at 1-800-FREDDIE from 8 a.m. to 8 p.m. EST. Or, go to http://www.fanniemae.com/homeaffordable and http://www.freddiemac.com/avoidforeclosure and fill out the online request forms.

More on the housing plan below:

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