by David Smith
The multitude of recent news reports out of Washington results in a lot of questions concerning President Obamas plan to reduce foreclosures. I will attempt to minimize this confusion by briefly explaining the highlights of Obamas plan. The government estimates that this plan will assist up to nine million distressed homeowners. As the Mortgage Bankers Association indicates that there are about 51 million first mortgages in the US, this means about 18 percent may qualify for this program which was launched in March, 2009. This is a summary of a very detailed program which you can learn more about by going to the US Government website at financial stability.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, etc. This 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
A Summary of the HAR Program:
Requires the current mortgage to be guaranteed by either Fannie Mae (FNMA) or Freddie Mac (FLHMC). To see if you meet this guideline, call (800) 7FANNIE or (800) 7FREDDIE between 8am and 8pm, EST. The property must be your primary residence; second homes and investment properties do not qualify. You must show sufficient income to qualify. Mortgage payments must be current and a one-year history must reflect no payments being 30 days late. The amount owed on the first mortgage cannot be more than 105% of the market value of your home. If your home is valued at $100,000, then the most you can owe is $105,000 Additional lien holders, as in a second mortgage, HELOC or other liens, must be willing to subordinate to the first mortgage holder, in writing. Simply put, this means that the first mortgage holder will retain their superior lien position. The total of all liens can exceed 105% of the current market value; however, the amount refinanced cannot exceed this amount. This program officially began in March of 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 I’m sure there’s a reason for this being the maximum, I have not 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.
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.”
I would like to disclose that this is my interpretation of the guidelines of this program and should be independently verified. Keep in mind that this is a government program; therefore, rules and guidelines are subject to change. Always keep informed
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