NorCalSavant

The Treasury Department has finally come out with detailed guidelines for the Making Home Affordable Program.  This housing rescue plan is estimated to cost $75 billion and help seven to nine million homeowners.

Is the plan going to reduce foreclosures?  Is it going to help delinquent and solvent homeowners?  And, is it going to be good for the economy?

There are two main programs within the Making Home Affordable Program.  The Making Home Affordable Program includes the Making Home Affordable Refinance Program and the Making Home Affordable Modification Program.

Home Affordable Refinance Program

The Home Affordable Refinance Program is for those homeowners who have been paying their mortgages on time.  With the recent plunge in property values, many homeowners have been left with less than 20% equity in their homes (or, their (mortgage) loan to (house) value is more than 80%), and therefore, cannot refinance their mortgages to take advantage of the lower interest rates of today.

The Home Affordable Refinance Program enables homeowners with up to 105% loan to value on their mortgages to refinance them to lower their payments.

To be eligible for the Home Affordable Refinance Program, you must have a Fannie Mae or Freddie Mac loan.  In other words only conventional loans are eligible, not jumbo loans.  You can call your loan servicer to find out if your loan is a Fannie Mae or Freddie Mac loan.  You can also contact Fannie Mae by phone at 800-7FANNIE (8am to 8pm EST), or online here, and Freddie Mac by phone at 800-FREDDIE (8am to 8pm EST), or online here to find out if your loan is a Fannie Mae or Freddie Mac loan.

Of course, your income must be enough to make the new payments.  If you just lost your job, you would not qualify.

The Treasury Department estimates that up to about four to five million mortgage holders would be able to take advantage of the Refinance Program.

Home Affordable Modification Program

The Home Affordable Modification Program is for those homeowners who can no longer afford their monthly payments and are close to defaulting or foreclosing.

The Home Affordable Modification Program will provide eligible mortgage holders with affordable monthly mortgage payments for at least five years.

To qualify for the Home Affordable Modification Program, the monthly mortgage payment (PITI or principal, interest, taxes, and insurance) excluding the secondary mortgage on the house must be more than 31% of gross income.  However, if your total debt (including home mortgage and other debts) is more than 55% of gross income, you will need to sign an affidavit promising to undergo counseling with a counselor approved by the Department of Housing and Urban Development before the loan modification can take place.

The loan must be a conforming Fannie Mae or Freddie Mac loan, and must have been taken out before January 1, 2009.  Very importantly, to qualify for the Modification Program you must not have enough liquid assets ignoring any retirement assets to pay off your mortgage.  Lastly, the house must be your primary residence.

If you qualify on all counts for the Home Affordable Modification Program, the loan servicer will attempt to reduce your mortgage payment to no more than 31% of the gross income by first reducing the interest rate on the loan to as low as 2%, and then successively extending the term of the loan to 40 years and deferring the loan principal.  To encourage participation, servicers will get financial incentives, such as an upfront fee of $1,000 per modification.  The loan modification can be done only once before 2012 when the program ends.

The modified interest rate will stay fixed for five years.  After that it will go up by 1% every year to catch up to Freddie Mac Primary Mortgage Market survey rate at the time of the loan modification.

As added bonus, after making timely payments for three months, borrowers may have an opportunity to have their second mortgages, if any, forgiven.  Those who continue to make timely payments may also see their principal cut by up to $1000 a year for five years.

According to the Treasury Department, the Home Affordable Modification Program may help up to three to four million borrowers modify their loans.

Treasury has a comprehensive self-assessment tool provided on this website to determine eligibility for the Making Home Affordable Refinance and Modification Programs.

Other Options for Those Who do not Qualify for the Making Home Affordable Program

According to Treasury’s web page here, there are a number of other options if you do not qualify for a Making Home Affordable refinance or loan modification.

These options include:

• A forbearance agreement wherein you make reduced payments for a specific period of time after which you make regular payments as well as an additional amount to pay off the past-due amount.
• A repayment plan allowing you to schedule payments for the past-due amounts if you missed any payments.
• Special mortgage relief assistance for active duty military service members.

Treasury’s Homeowner Affordability and Stability Plan also includes funding for mortgage servicers to help you with preforeclosure or short sale and deed-in-lieu of foreclosure agreements to help avoid the impact of a foreclosure on your credit rating.

The administration is also working on legislation that would allow bankruptcy judges to alter loan terms.  It will also shield firms that ease loan terms from investor lawsuits.

Effectiveness and the Impact of the Program on Foreclosures and the Economy

In the frenzied years of housing bubble, many house purchases were financed with subprime loans with little or no down payments.  A greater than five percent decline in property values, which is the prevailing norm, will make such a mortgage ineligible for the refinance program.

It is estimated that about 20 percent of the country’s 50 million mortgage holders owe more than 105 percent of their house’s value, and therefore, will not qualify for the refinance program.

The refinance program will most likely exclude areas with the biggest plunge in real estate prices.  For example, if you bought your house at the peak with a 10% down payment, your loan to value was 90%.  Now, a couple of years later, suppose your property value has fallen 25% from the peak, which is a fairly common scenario.  The loan to value for your house right now is then, about 90/75 or 120%.  A homeowner in such a situation would be ineligible to take advantage of the Refinance Program.

Basically, the Home Affordable Refinance Program puts some extra cash into a solvent homeowner’s pocket by reducing their mortgage bills.  It is unlikely to help homeowners who had put little down at the time of purchase or cashed out their equity near the peak of the housing bubble.  It will provide some fillip to the economy by increased disposable income and spending by the consumer.  However, the target group forms only a small part of the total American consumer population.

Treasury estimates that with the average house in the U.S. valued around $200,000, the average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 or 3% relative to what it would otherwise be absent the Home Affordable Modification program.

However, with the restrictions on the loan amounts and owner occupancy coupled with the steep decline in property values, the program will likely not be effective in stabilizing home prices in key markets such as California, Nevada and Florida.

So, all in all, the Home Affordable Refinance Program will put extra money into the pockets of some solvent mortgage holders, and help a little with the economic recovery in the country.  The Home Affordable Modification Program will help some delinquent or nearly delinquent mortgage holders avoid foreclosure.  It will help a little in arresting home price decline and the economic recovery in some geographic locations in the country.

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