The recently announced Homeowner Affordability and Stability Plan is a sweeping effort to stem the national tide of foreclosures and to help as many as 9 million homeowners stay current on their mortgages. Here’s a look at what the plan will entail and who will be eligible for assistance.

Basics of the Plan

sinking-boatThe nationwide foreclosure problem has caused a ripple effect of lowering home values throughout individual communities. The Obama administration’s plan marks the largest government response since the beginning of the housing crisis. At its core are three main strategies:

1. Secure refinancing for as many as four million responsible homeowners, with the goal of making monthly payments more affordable
2. A $75 billion stability initiative to encourage lenders to modify loan terms for three to four million mortgages at risk of foreclosure or already in foreclosure.
3. Additional financial support for Fannie Mae and Freddie Mac.

Housing Affordability

Under traditional rules, homeowners who owe more than 80 percent of their home’s value cannot easily refinance their mortgage. Many homeowners who have paid money down and are current on their monthly payments have seen their home’s value drop enough that they lack the necessary equity to qualify for refinancing.

Under the Housing Affordability and Stability Plan, qualifying homeowners would be able to refinance their mortgages to current rates, making monthly payments more affordable. For those borrowers who are currently facing high rates following an ARM reset, the plan offers a chance to switch to a lower fixed rate mortgage.

Who Qualifies – In order to qualify for this portion of the plan:

  • Borrowers must have mortgages guaranteed by Fannie Mae or Freddie Mac.
  • Homeowners must owe more than 80 percent of their home’s current appraised value.
  • Homeowners must not owe more than 105 percent of the home’s current appraised value.
  • Borrowers must be current on monthly mortgage payments.

    • Homeowners with second mortgages will also be eligible but with additional restrictions. Along with the 105 percent limit, borrowers must be able to prove that they can still meet payment terms on the original loan and the lender must agree to keep the original loan in “primary position” in terms of monthly payments.

    Who Doesn’t – While some details of the plan have not yet been released, initially it appears that the following groups of borrowers may not qualify for this portion of HASP:

  • Borrowers who owe significantly more money than their home is worth.
  • Most borrowers whose mortgage exceeds the $417,000 conforming limit.

    • Housing Stability

    The second portion of the plan is designed to provide relief to homeowners whose loan payments have risen to 40 or even 50 percent of their monthly income. The plan’s goal is to reduce the total monthly mortgage payments for struggling homeowners. To do so, the Financial Stability Plan has allocated a total of $75 billion in incentives that should encourage lenders to modify loan terms.

    Some components of the plan include:

  • Shared Modification Responsibility: lenders will be responsible for modifying loans so that the borrower’s payment is reduced to 38 percent of their monthly income. Following that point, the initiative will match further reductions dollar for dollar down to 31 percent.
  • “Pay for Success” Incentives for Servicers will be awarded when borrowers stay current on a modified loan, in addition to an up-front incentive paid at the time a loan is modified under the program’s guidelines.
  • Borrower Incentives will entail a monthly balance reduction payment applied to the loan’s principal as long as the borrower remains current on payments.
  • Early action incentives will include payments to both the servicer and borrower when an at-risk loan is modified before payments become delinquent.

    • Who Qualifies –

  • Borrowers whose combined mortgage balance exceeds the current market value of the home.
  • Individuals with high debt/income ratios.

    • Who Doesn’t – The administration has indicated that the following categories of borrowers will not qualify for this portion of the plan:

  • Borrowers who do not live in the home
  • Speculating investors or home flippers
  • Borrowers whose mortgages exceed the Fannie Mae/Freddie Mac conforming limits

    • Support for Fannie and Freddie

    Using money authorized by congress in 2008 under the Housing and Economic Recovery Act, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac by $200 billion total. Specifically, Treasury will increase Preferred Stock Purchase Agreements to $200 billion each (from the previous level of $100 billion each).

    The overall goal behind this move is to increase confidence in the two mortgage giants and by doing so support the continuation of low mortgage rates.

    Other Provisions in the Plan

  • $1.5 billion in relocation and other assistance for renters displaced as a result of landlord foreclosure.
  • $2 billion in neighborhood stabilization funds.

    • If you have any questions please give me a call.

    Take care,

    Dale Chumbley