The crisis in the housing market has caused the government to intervene with the details of this initiative released on March 4, 2009. Currently a "Facts" paper is available on the U.S. Dept of the Treasury website. In general, the plan applies to mortgages on primary residences and is not available to speculators, investors (even if the owner lived in the home at one time), or to those without an income. The plan can be viewed in its entirety on the Treasury website, but this overview focuses exclusively on the homeowner.
Homeowners Have Three Options to Avoid Foreclosure
1. Refinance Candidate - He is current on his mortgage, but for whom refinancing into a fixed rate at today's low rates would ensure future financial stability. He has not been able to refinance, however, because he owes more than his home's value and lenders are unwilling to refinance the current balance.
2. Modification Candidate - He is struggling to make payments because his income is insufficient due to recession based issues, yet is unable to sell his home because of the declining market.
3. Bankruptcy Modification Candidate - His credit has suffered and he is in or near foreclosure and unable to take advantage of the modification plan.
Mortgage Refinance Candidate
This homeowner can take advantage of new guidelines that allow a refinance of 105% of his home's value. The mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac. (Check with the lender)
The rates and closing costs are determined by the lender and the homeowner must meet qualification guidelines, providing required documentation. The plan doesn't reduce the principal on the current loan, but loans refinanced under the program will have no prepayment penalties or balloon notes.
If the borrower has a second mortgage he may still able to refinance his first mortgage at 105% of the value, if the second lien holder will re-subordinate the loan.
If qualified, a homeowner should still determine his breakeven point.
Mortgage Modification Candidate
According to the Treasury's "Facts" paper, a homeowner with high combined mortgage debt compared to income (more than 31%) or who is “underwater” (with a combined mortgage balance higher than the current market value of his house) may be eligible.
The current lender is not required to participate, however, the plan provides several thousand dollars of incentives to lenders who successfully modify a qualifying mortgage. The goal is to get the payment to 31% of the homeowner's income, by a shared rate subsidy between lender and government. The lender could also modify the principal balance. The homeowner is incented by a bonus for paying the modified mortgage payment on time for five years, a potential total of $5,000.
There are no costs for modification or HUD approved housing counseling. Homeowners should be wary of companies charging a fee for this program.
Bankruptcy Mortgage Modification Candidate
For homeowners who cannot take advantage of the mortgage modification option, the Plan allows for bankruptcy courts to modify the terms of the mortgage. This has been referred to as a partial “cram down”. Per the "Facts" publication, “… mortgage loans in excess of the current value of his property will now be treated as unsecured. This will allow a bankruptcy judge to develop an affordable plan…”. In the past, mortgage modification would not have been possible in bankruptcy.
If his home is currently in foreclosure, he should contact the mortgage servicer or HUD counselor to discuss options. Many lenders have agreed to hold off on foreclosures for mortgages that may qualify.
If you need help, be sure to explore your options, but be careful of scammers. You can go to the government website, Making Home Affordable, to find out if you qualify.
For information on Obama's Recovery Act, click here: American Recovery Act
Resources:
U.S. Department of Treasury Website
Making Home Affordable Website
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