Obama's Mortgage Relief

From Realty Times on February 26, 2009

Obama's Mortgage Relief Could Bailout 9 Million Homeowners
by Broderick Perkins

The President Barack Obama administration's "Homeowner Affordability and Stability Plan" could help as many as 9 million struggling homeowners, but largely those in lower-cost housing areas.

The $275 Billion Plan, with a March 4 rollout, includes a refinancing program for "responsible" borrowers who haven't missed payments and whose loans are larger than the value of their homes, and a loan modification provision with incentives for lenders to voluntarily modify certain mortgages.

Many Californians and others in high cost areas may not see much immediate relief but federal aid earmarked for those higher-cost areas could come later.

Refinancing

Under the refinancing provision, homeowners with less than 20 percent equity in their homes, who now find it difficult -- if not impossible -- to refinance, will be able to get new loans at lower interest rates provided the new note doesn't exceed 105 percent of the home's value.

A refinanced mortgage replaces the old loan with a new one. The provision targets 4 to 5 million homeowners.

Struggling homeowners in California and other high cost housing markets will benefit less from the plan because the provision only applies to mortgages held by Fannie Mae and Freddie Mac.

During boom times Fannie Mae and Freddie Mac loans were only up to a maximum of about $417,000. The limit was temporarily raised to $729,750 in 2008, when fewer people were buying. This year, the limit went back to $625,000. The latest federal economic stimulus package (American Recovery and Reinvestment Act), which Obama signed in February, returned the limit to $729,750, at least for 2009.

An estimated 60 percent of the home loans made in California in 2006 and 2007 were larger than Fannie and Freddie loan limits. During 2008 about 33 percent of home loans were above those so-called "conforming" levels, according to the California Association of Realtors. Other high-cost regions experienced varied levels of "non-conforming" loans.

"When I saw 'Fannie Mae and Freddie Mac' I said his (President Obama's) team needs to come to Silicon Valley," said Quincy Virgilio, president of the Santa Clara County Association of Realtors.

"This isn't going to help many people here," he added.

Virgilio said the bulk of California's home-owning population lives in major metropolitan areas where housing costs are high.

Loan modifications

The loan modification part of the plan targets 3 to 4 million "at-risk" homeowners, those with a high mortgage debt-to-income ratio and those with mortgages larger than the value of their home or "under water."

A loan modification, unlike a refinance, changes the terms of the existing loan without writing a new one and could serve higher-cost housing markets better than the refinance plan.

Also called a "workout," this provision is open to anyone including those who haven't missed payments, but may be at risk of missing payments. A modification is designed to get payments down to 31 percent of the homeowner's income. That could be accomplished by a reduction in the interest rates or principal, or an extension of the term of the loan, or perhaps a combination.

The modification plan is open to anyone with any loan that has a balance under Fannie Mae and Freddie Mac limits, which now as high as $729,750.

The modification program, also designed to standardize a hodge-podge of modification efforts by lenders, also comes with incentives for both homeowners and lenders.

Loan services get up to $4,000 for modifying mortgages and borrowers got a principal reduction of up to $5,000 over five years for paying on time.

Credit market boost

Obama's plan also calls for an infusion of $200 billion into the government-owned Fannie Mae and Freddie Mac. The bundle should help lower interest rates and spur more borrowing.

Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California-Berkeley and the Rosen Consulting Group says more relief could come to high-cost areas.

Obama administration's plan also seeks to change bankruptcy rules to allow judicial mortgage modifications to reduce mortgage balances to fair market value provided the borrower sticks to a court-ordered payment plan.

National Association of Consumer Bankruptcy Attorneys (NACBA) applauded the judicial workout proposal.

"Ever since the mortgage foreclosure crisis erupted into the public view in 2007, a broad array of consumer, civil rights, housing, community, labor and other organizations, as well as economists, have advocated judicial mortgage modification relief as an effective approach to stemming the growing tide of foreclosures – a solution that, unlike every other solution being considered in Washington, comes at absolutely no cost to U.S. taxpayers," said NACBA president Carey Ebert of Fort Worth, TX, in a prepared statement.


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