The Obama administration’s plan for a housing rescue aids two groups of homeowners largely left out of previous efforts and aims to deny benefits to those who have been unwise or greedy, according to details released Wednesday.
The plan would greatly expand mortgage relief to those who have not missed payments and those whose homes are worth less than their mortgages.
What the program will not do, administration officials insisted, is reward those who dug themselves into a hole through ill-advised actions.
Nor will it provide much more help to those in high-priced areas, such as Los Angeles and Orange counties. It does reinstate last year’s higher loan limits for refinanced or modified mortgages to as much as $729,750.
“The plan is not intended to prevent every foreclosure or help every homeowner,” said a senior government official who briefed reporters on condition of anonymity. “It is targeted at responsible homeowners. It will do nothing for speculators or flippers.”
Lenders and brokers said that reinstating higher caps for eligible loans would help certain borrowers whose mortgages were purchased or backed by Fannie Mae or Freddie Mac. Those quasi-government financing giants could deal only with loans up to certain limits, which vary by area according to median home prices.
The higher cap had expired at the end of December, reducing eligible loans to $625,500 in more-affluent regions such as Los Angeles. The higher limits the Obama stimulus plan reinstated last month expire at the end of this year.
“Basically, the invitation to the refinancing party has just been extended to a lot of people in Southern California,” said Greg McBride, senior financial analyst at Bankrate.com.
It remains to be seen whether the program will fulfill the administration’s broader hopes of helping 7 million to 9 million Americans get new mortgages and stem the tide of foreclosures that continue to erode the housing market.
At heart, the housing rescue plan remains voluntary for lenders, though any financial institution receiving government capital going forward will be required to take part.
The idea is not to prevent all foreclosures but to curb those the government deems unnecessary -- involving loans to responsible borrowers doing their best to stay in their home during rough economic times. In most cases, officials said, avoiding foreclosure not only helps families but also recoups more of a lender’s investment.
“This plan will help make homeownership more affordable for 9 million American families and, in doing so, help to stop the damaging impact that declining home prices have on all Americans,” said Housing and Urban Affairs Secretary Shaun Donovan.
The administration has dubbed the housing plan the Making Home Affordable initiative, and it has two main parts. One is aimed at certain “underwater” homeowners who want to refinance into a lower rate, and the other at borrowers facing financial hardship who are seeking a way to lower their monthly mortgage payments.
Both programs are limited to borrowers who live in their homes, owe no more than $729,750 and fully document their incomes.
The programs are effective immediately, though it may take some time for lenders and servicers to implement them.
“There are lots of borrowers who are significantly underwater in California [and other expensive areas] who will be able to get into sustainable mortgages under the program,” said the senior official who briefed reporters on condition of anonymity.
Details of the eligibility requirements for both programs are posted on the government’s economic recovery website at www.financialstability.gov.
The first part of the program, called Home Affordable Refinance, is aimed at homeowners whose property has lost value as housing prices have plummeted. It would be open only to borrowers with so-called conforming loans backed by Fannie Mae and Freddie Mac, and it would waive the usual conforming requirement that the borrower have 20% equity in the home.
The program would not reduce the principal of the loan, but it would allow the borrower to refinance that principal up to 105% of the current value. Usual fees would apply, though for many borrowers the procedures would be streamlined.
Interested borrowers would have to contact their loan servicers to determine whether their mortgages are held or guaranteed by Fannie Mae or Freddie Mac. Loans made with the support of other agencies, including the Federal Housing Administration, the Department of Veterans Affairs or the Department of Agriculture, are not eligible.
The second program, called Home Affordable Modification, is more complex and is aimed at borrowers whose mortgage payments have become unaffordable either because of a hardship such as job loss or illness or because the interest rate has been reset higher on an adjustable-rate mortgage.
For those borrowers, the government would provide cash payments and financial subsidies to help the lender lower the monthly payment to no more than 31% of the borrower’s gross monthly income.
In most cases the lender would reduce the interest rate on the loan to as low as 2% for five years. If that was inadequate to bring down the payment, the lender also could extend the term of the loan to 40 years or temporarily reduce the loan principal. In those cases, the set-aside portion of the loan principal would be repaid to the lender in a balloon payment when the house was sold or refinanced.
The 31% target income level would apply only to the borrower’s primary mortgage payment; second mortgages, home equity loans and other consumer debt would not be included in that calculation.
However, administration officials said they would offer additional financial incentives to servicers to reach agreements with second-lien holders to accept partial repayment of those debts. Details of that policy are still being worked out.
To address the problem of borrowers who default again on mortgages, the government would provide additional payments to lenders and servicers the longer the borrower stays current on the loan. And borrowers would also see a benefit: For each of the first five years that they continue to pay the mortgage, the government would reduce the loan principal by $1,000.
And those whose interest rates are reduced below market value would see rates float back gradually after the initial five-year loan period -- at 1% a year, up to the market rate on the day the loan modification was signed.
“There is long-term affordability built into the plan,” the senior official said.
Interested borrowers should contact their servicers directly, administration officials said, and should pay no fees to access the program.
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A plan for making homes affordable
Under part of the Obama administration’s housing plan, the government and lenders would share the burden of aiding homeowners unable to make their monthly mortgage payments.
Eligible borrowers must be screened for financial hardship. A change in circumstances must be verified through documentation.
Servicers must follow a sequence of steps to reduce the payment on a primary mortgage only to no more than 31% of monthly income:
1. Reduce the interest rate to as low as 2%.
2. Then, if necessary, extend the term or amortization of the loan to as much as 40 years.
3. If the monthly costs are still too high, temporarily suspend principal payments or even forgive some of the principal.
Source: Treasury Department