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As Long as We Remember...

February 25, 2009

Homeowners Stability Initiative

Michael Kurtianyk

On February 18, President Obama unveiled his administration’s plan to address our continuing housing crisis. President Obama’s $75 billion Homeowner Affordability and Stability Plan would help struggling homeowners by providing incentives to lenders, servicers, mortgage holders and borrowers to help modify mortgage loans.


The goal of the 3-year Homeowner Stability Initiative is to reduce the monthly payment of homeowners to affordable levels using $75 billion from TARP and the GSEs (government sponsored entities). The program will be available for home owner-occupants “at risk of imminent default” even if they are current in making mortgage payments, as well as those already delinquent. It will only apply to mortgages at or below the GSE conforming loan limits.


This is a strong first step in keeping 9 million of our citizens from losing their homes, but by no means is this a comprehensive plan. Logically, there can’t be one at this time, when you factor in the scope of work needed to address this housing crisis.


It could ultimately cost taxpayers as much as $275 billion — $75 billion in direct spending to keep people in their homes and the rest in additional financial backing for Fannie Mae and Freddie Mac.


The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.


With this financial backing comes a large string attached: Fannie Mae and Freddie Mac will be responsible – subject to Treasury’s oversight and the Federal Housing Finance Agency’s conservatorship – for monitoring compliance by servicers with the program.


A mortgage lender would have to first make enough concessions to reduce a borrower’s payments to 38 percent of monthly income. To encourage lenders, the government would offer incentives, like a $1,000 upfront payment for every loan modified and more payments if the borrower stays current.


If the lender gets the monthly payments down to 38 percent of the borrower’s monthly income, the government would then match, dollar for dollar, additional reductions to bring the payment as low as 31 percent of monthly income.


As an incentive for lenders to modify more mortgages, the Obama plan—together with the FDIC—has developed a partial guarantee initiative. The Treasury Department will establish an insurance fund of up to $10 billion to discourage lenders from foreclosing on mortgages, by limiting their lose if home prices decline more than expected. Mortgage holders of modified mortgages could receive a payment on each modified loan, linked to home price index declines.


For those borrowers unable to maintain homeownership, even under the affordable terms offered, the plan will provide incentives to encourage families and lenders to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on lenders, borrowers and communities alike.


One component that I find encouraging is that, under this plan, the Department of Housing and Urban Development will also make available funding for non-profit counseling agencies to improve outreach and communications, especially to disadvantaged communities and those hardest-hit by foreclosures and vacancies.


            The plan also includes a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.


Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.


Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.


The big limitation of the refinancing portion of the plan is that it would not help most borrowers who are current, but under water. It would only be available for mortgages that are not more than 5 percent above the current market value of the house.


What this plan won’t do is completely stop the high number of foreclosures. No one plan can accomplish this.


Nor would it provide much help to millions of homeowners who are “under water,” or holding mortgages that are bigger that the market value of their houses.


However, we need to start somewhere, and this plan is a strong beginning. Our current housing crisis is a continually moving target, and we need to do something now. We need to continue to do more, as times change and our national economy tries to rebound.


Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.


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