Investor

03/08/09 - Treasury's New Plan to Stem Foreclosures - Making Home Affordable Program

By: John Pitlosh CFP, MST

Government working for you...?  Hard to believe these days, but the government might have actually gotten something right.  The Treasury's new housing program is helping the average taxpaying homeowner in a 2 for 1 deal.  Directly, their $75 billion new program is helping struggling homeowners restructure or refinance their current mortgages, so their mortgages don't become unsustainable.  This program should directly reduce the likelihood of your neighbor's bank sticking a foreclosure sign on their lawn.  Indirectly, this new program has created an interest rate environment that all of us can benefit from.  Because this initiative could only be successful in a low interest rate environment, the government had to enact other initiatives like the treasury buy-backs to artificially create a low interest rate for mortgage restructuring.  As a result of the government's indirect activities, it has produced a historically low interest rate environment that is available to the rest of us.

The "Making Home Affordable Program" is a 2 piece $75 billion dollar initiative that is designed to help existing homeowners refinance their existing mortgages into lower rate fixed mortgages and incentivize lenders and loan servicers to modify existing mortgages to avoid primary residence foreclosures.

The Home Affordable Refinance Program - This program is designed to help the roughly 4 to 5 million homeowners that are unable to refinance their existing mortgage due to the decline in their home values. If you have been current on your payments for the past 12 months and you have a mortgage that is either owned by or guaranteed by Fannie Mae or Freddie Mac, then you might be able to benefit from this initiative.  This program is specifically designed to help borrowers whose loan-to-value ratio was pushed up into the 80% - 105% range due to declining property values.  Under these circumstances, borrowers would normally be unable to refinance their mortgage because their property has lost too much value.  Under the Home Affordable Refinance Program, some homeowners will now be eligible to do the following:

• 1. Refinance at a lower interest rate.
• 2. Shorten the amortization term of the mortgage.
• 3. Replace adjustable, initial interest, and balloon mortgages with 15, 20, or 30 year fixed mortgages.

Since lenders and servicers already have much of the borrower's information on file, documentation shouldn't be as onerous, and in some cases an appraisal will not be necessary.  That said, any mortgage refinancing that raises monthly payments by 20% will need to re-do the underwriting.  Overall, the flexibility in the process will make the refinance quicker and less costly for both borrowers and lenders.  The program appears to officially kick off on April 1^st, 2009 and runs through June 10^th, 2010. 

Where can I go for more information and to see if I qualify?

http://www.financialstability.gov/makinghomeaffordable/refinance_eligibility.html

The Home Affordable Modification Program - This program is the more controversial of the two as it involves taxpayer rewards and bankruptcy judge ultimatums.  The modification program is designed to help roughly 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments through loan modification and principal reduction.  The program applies a carrot and stick methodology to motivate lenders and servicers to the negotiating table.  The carrots are specific financial incentives funded by taxpayers that are designed to get the lenders and homeowners to work out more manageable terms and reward them through financial incentives over the long term success of the arrangement.

The "controversial" stick that the program will be applying to lenders and servicers that don't step up to the plate and negotiate, is the possible injection of bankruptcy court judges into the process.  If a homeowner goes into bankruptcy, a bankruptcy court judge will be given the ability to restructure and modify the terms of a mortgage to come up with a more workable solution.  At first glance, this would appear to be a bad idea because it would force lenders to reassess their risk and raise rates on the rest of us to make up for the increased level of risk that they would assume.  Fortunately, this arbitrary injection of a judge's solution will be limited to loans before 1/1/09.  Hopefully, closing the window to future modifications will keep future lenders from having to recalculate their risk assumptions and increase rates on the rest of us down the road. 

The window for loan modification ends on December 31^st, 2012.  In order to get the carrot and stick working efficiently, various housing agencies will be working together to develop program guidelines that are expected to become industry standards in pursuing affordable and sustainable mortgage modifications.  This program will work in tandem with the new and improved Hope for Homeowners Program that was put in place over the summer of 2008.  Since most of the information is already available to servicers and lenders, the process of loan modification should be less onerous than you might think. 

Where can I go for more information and see if I qualify?

http://www.financialstability.gov/makinghomeaffordable/modification_eligibility.html

Conclusion:

In the midst of the political back and forth over the Stimulus Bill, the Budget, and the bailouts of banks, automobile manufacturers, and AIG, the government has actually produced a spending program that can tangibly help ordinary Americans.  For those of us that may benefit directly from this program, finding out if we qualify is the first step. To that end, I have attached a direct link to the "Making Home Affordable Program" government website.  Their website is very comprehensive and will walk you through the steps for each program.

For those of us that don't qualify for any of these programs, the government has created a window for us to retune or restructure our existing mortgages, so if you haven't looked at your current mortgage and compared them with your available options...you should!  It is conceivable that the amount of savings from lower interest rate payments on longer term loans could be equivalent to your principal erosion.  While that isn't the case for most people, every little bit of savings can help.

For those of us that are suffering from "Bailout Fatigue" and wondering how we are being helped...here is your half eaten piece of the pie.  This program directly attacks the issue of principal erosion by helping people with underwater mortgages refinance at lower rate allowing them to stay in their homes.  If you really want to protect the principal of your home equity, having your neighbor in his home paying his mortgage is one of the best ways to do it.  While the program may not be big enough to halt home equity erosion, it should at least help reduce the rate at which it is occurring.  Even though this program could "bail out" homeowners that bit off more than they could chew, it is not designed to bail out people like the bus driver that purchased an $800,000 house.  At the end of the day, this bailout might not be the best solution, but this solution is less destructive to our home values and communities than the alternative, massive home foreclosures. 

Resources:

Making Home Affordable Program - The government has put up a comprehensive website that will walk people through the process of finding out if they are eligible for either the refinance or modification program.

http://www.makinghomeaffordable.gov/

Loan Modification Guidelines from Treasury - These guidelines spell out the financial incentives to lenders and borrowers.  They also attempt to describe the new powers given to bankruptcy court judges.

http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf

Does Fannie Mae own or guarantee my mortgage?  Ask your lender or contact Fannie Mae directly:

http://www.fanniemae.com/homepath/homeaffordable.jhtml;jsessionid=B3EN5U04GACI1J2FQSHSFGA

Does Freddie Mac own or guarantee my mortgage?  Ask your lender or contact Freddie Mac directly:

https://ww3.freddiemac.com/corporate/

Hope for Homeowners Program - The Bush Administration recently unveiled additional mortgage assistance for homeowners at risk of foreclosure.  The HOPE for Homeowners program will refinance mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by HUD's Federal Housing Administration (FHA). Call 1 (800) 225-5342 for more information.

http://www.hud.gov/hopeforhomeowners/

 

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