FAQ: How Will Obama's Housing Plan Work in the Bay Area?

FAQ: How Will Obama's Housing Plan Work in the Bay Area?

Below is an email I had to share with my readers.

President Obama announced a $75 billion plan on Wednesday that he said would help as many as 9 million Americans avoid foreclosure.

As EconWatch previously noted, not all of the details are public, and we’re expecting to hear more on March 4. For now, though, the below list of Frequently Asked Questions reflects what we’ve been able to find out so far.

Q: Which mortgage borrowers qualify?

The Homeowner Affordability and Stability Plan is limited to loans held or securitized by Fannie Mae or Freddie Mac, which as of January 1, 2009 have been capped at $417,000 for most areas of the United States and $625,500 for what are called “high cost” areas. There are higher limits for Alaska, Guam, Hawaii and the U.S. Virgin Islands. Mortgages that are linked to Fannie and Freddie are known as “conforming” loans.

Q: If I’m current on my mortgage but my home has decreased in value since I bought it, can I benefit by refinancing?

Perhaps. First, you have to hold a Fannie or Freddie conforming loan. Second, your house can’t be too far underwater. The Treasury Department says: “Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105 percent of the current market value of the property.”

Translated: If you owe more than $210,000 on a house that’s now worth $200,000, you’re out of luck.

Q: Couldn’t I already refinance a Fannie and Freddie mortgage?

Yes, but there was a specific loan-to-value ratio that was required. A senior administration official who did not want to be identified said on Wednesday that the loan-to-value criteria would be waived.

Q: Okay, let’s say I meet those qualifications — what does this get me?

The idea is to shift home-buyers (really home-debtors) from riskier adjustable-rate mortgages into traditional 15-year or 30-year fixed-rate mortgages without prepayment penalties. This means that your current payments could actually increase if you refinance, especially if you have a “teaser” rate, so choose wisely.

Q: If I’m current with my mortgage and use this program to refinance, will this reduce how much I owe?

Nope. It’s just designed to aid refinancing — meaning that if you have a 7 percent or 8 percent mortgage and haven’t been able to refinance, you now stand a better shot of doing it. You’ll still owe the same amount in debt. (Actually, because of refinancing costs, you’ll probably owe a few thousand dollars more.)

Q: So if my house has fallen by more than the approved amount, or I don’t have a confirming mortgage because I live in a more expensive area, and I’m not having trouble making payments, where does that leave me?

Unless the March 4 announcement contains some surprises, you’re left with the same options that you had before Wednesday’s announcement.

Q: The above answers are interesting, but they don’t apply to me because I’m behind on my mortgage or struggling to make payments. How am I affected?

This is a bit more complicated. If you’re behind on your payments or at risk of imminent default, you may qualify for a payment reduction. You need to (a) have a conforming mortgage; (b) have a monthly mortgage payment greater than 31 percent of your monthly pre-tax income; (c) live in the property as your primary residence.

Also, borrowers with “high debt levels,” meaning 55 percent of their pre-tax income including mortgage payments, car loans and credit card debt, will be required to enter a government-approved counseling program.

Q: If my monthly mortgage payment is less than 31 percent of my gross income, and my house is badly underwater, do I qualify?

Apparently not.

Q: If I meet those three conditions and I’m behind or struggling, then what?

There’s no one-size-fits-all rule. Mortgage lenders can choose to — but, as of the time this was written, are not legally obligated to — reduce interest rates or even lower the amount owed. If you think you qualify, the Treasury Department says you should wait until early April to see if you’re contacted automatically by your mortgage lender. If you’re not, call them directly.

Q: How does this idea of payment reductions work?

Details are still unclear, but it seems as though lenders that choose to participate in the program are supposed to reduce interest rates so monthly payments do not exceed 38 percent of gross income. Then the Treasury Department will kick in taxpayer dollars to bring the payments down to 31 percent of income, and those rates will last for five years.

Q: What happens after five years?

After five years, according to the Treasury Department, the “mortgage payment will adjust upward at a moderate, phased-in level.”

Q: What information will I need when I talk to my lender?

You’ll need information about the monthly gross income of your household including recent pay; stubs if you receive them or documentation of income you receive from other sources; your most recent income tax return; information about any second mortgage on the house; payments on each of your credit cards if you are carrying balances from month to month; and payments on other loans such as student loans and car loans.

Q: Does this create an incentive for homebuyers to run up large balances on credit cards or under-report income before contacting their lender?

Yes. This is what economists call “moral hazard,” which risks rewarding behavior that should be discouraged.

Q: If I understand this right, if I’m current on payments, I don’t qualify for a reduction in the amount owed (a principal reduction). But if I’m behind on payments or claim default is imminent, I do. Is that right?

Yes. The caveat is that it appears that borrowers who remain current get an “incentive payment” of $1,500 if they remain current through their loan modification. They also qualify for a bonus of $1,000 a year for five years if they keep up with payments (the lender gets $1,000 a year too).

Q: You said above that only owner-occupied homes qualify, but how will banks verify this?

Different banks are likely to use different techniques. Some banks may send a certified letter, and others may make a physical visit. There seems to be no requirement that you live in the property today, so it’s reasonable to expect some vacant homes to be quickly reoccupied in the next few weeks or months.

Q: What incentive do lenders have to participate?

Foreclosure is a lengthy and expensive process; a front-page article in Wednesday’s Wall Street Journal profiling judges hearing foreclosure cases in Lee County, Fla. noted that many cases have been pending for months or longer. Banks may decide they’ll lose less money on a property — especially if home prices eventually rise — by renegotiating the terms of the mortgage rather than taking it to foreclosure.

This is already happening. An analysis by Alan White, a Valparaiso University law school professor, showed that half of the voluntary mortgage modifications already result in lower monthly payments — and that the average foreclosure loss on a first mortgage in November 2008 was $145,000. The new incentives from the Feds may be enough to convince more banks to agree to reductions in interest or even principal.

Q: Will this new government program aid housing speculators?

Perhaps. If a speculator claims that a house with an underwater mortgage is his primary residence, he’d obviously benefit. Unless the final rules specify otherwise, a speculator could shift primary residences every few months and try to reduce payments on each property. Also, multiple-unit homes with up to 4 units qualify for the program.

Q: How long will this program last?

After three years from now, no more homeowners will be eligible.

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