Obama's Housing Plan Takes Aim at Foreclosures

By Dawn Handschuh, Personal Finance Writer   

Obama's housing plan aims at foreclosures

As many as nine million Americans who are flirting with foreclosure or unable to refinance due to shrinking home values could be helped by President Obama's $275 billion housing plan, announced on February 18 and due to roll out on March 4, 2009.

The two-pronged plan makes it easier for homeowners to either refinance or modify their loans. Here's are some of the plan's highlights:

For homeowners unable to refinance due to dwindling home equity

This part of the plan would help an estimated four to five million homeowners, primarily those who have been unable to refinance due to plunging home values, refinance to a fixed-rate, 15- or 30-year loan.

To qualify for refinancing under the program:

  • Your loan must be owned or guaranteed by Fannie Mae or Freddie Mac, which together back half of all U.S. mortgages.
  • You must be able to make the new payments.
  • You must have a responsible history of making mortgage payments.
  • If you owe more than your home is worth, you may still be eligible for the program if your new mortgage doesn't represent more than 105% of your home's current market value.

    For example, if your home is worth $400,000, you can qualify for the new refinance program if you owe less than $420,000. At first blush, the 105% rule may seem broad enough to include virtually everyone. However, analysts say that it won't help most of the homeowners who have underwater mortgages and live in the states most affected by the drop in housing values.

A recent Pew Research Center poll found that 30% of mortgage holders believe that if they had to sell their home now, it would sell for less than they owe.1

For homeowners struggling to pay hefty mortgages

Loan modifications will make monthly payments more affordable for an estimated three to four million homeowners who are on the verge of foreclosure.

To qualify for a modification of an existing mortgage loan with a reduced interest rate (a quicker and less costly process than a refinance):

  • Your monthly mortgage payments must be more than 31% of your gross monthly income.
  • You must be modifying a loan on your primary residence.

However, you don't need to be behind on your payments to qualify, nor do the loans have to be owed by Fannie Mae or Freddie Mac.

While lenders aren't required to participate in either program, the plan offers them various financial incentives to do so, including upfront payments of $1,000 for each loan they modify. Lenders would need to lower monthly payments to 38% of a borrower's monthly income, either by lengthening the repayment period, lowering the interest rate or reducing the loan balance. The government would then match markdowns with the lender to get the loan payments down to as little as 31% of a borrower's gross monthly income.

One of the more controversial aspects of the package would permit bankruptcy judges to change mortgage terms and monthly payments in court. Congress would need to pass legislation before this provision could be implemented, though.

The plan will funnel $75 billion in federal funding to avert foreclosures via loan modifications and $200 billion to guarantee Fannie Mae/Freddie Mac refinances.

One potential monkey wrench in the loan modification part of the plan is the fact that millions of homeowners with two mortgages used one lender for their primary mortgage and a different lender for their second mortgage. Loan modifications in these situations could be problematic.

In addition, please read "6 Steps to Help Avoid Foreclosure" for some proactive measures you can take.

Footnote
1 "One-In-Five Homeowners Feel 'Underwater' On Mortgages," Pew Research Center, February 19, 2009