As part of his strategy for economic recovery, today President Obama unveiled his plan to help stem the explosion in home foreclosures. Dubbed the "Homeowner Affordability and Stability Plan," it aims to prevent millions of US homeowners from losing their homes by providing refinancing, encouraging lenders to modify mortgages, allowing court ordered mortgage modifications in bankruptcy, and by providing $200 in additional capital to Fannie Mae and Freddie Mac.
As reported in the New York Times, Obama's plan targets two groups of homeowners: 1) owner-occupants current on mortgages but unable to find refinancing to a lower rate; and 2) owner-occupants unable to keep up and in danger of foreclosure. The plan's details will be published when it goes into effect on March 4.
For those still current and able to pay on their mortages, but with high interest rates, Obama's plan offers increased access to refinancing. This refinancing will be available only for mortgages held or securitized by Fannie Mae or Freddie Mac. It will include some "under water" mortgages, where the amount owed is more than the current value of the home. As Obama noted in his remarks, Fannie Mae and Freddie Mac currently do not guarantee refinancing when the mortgage amount is 80% or more of the home value. Under the new plan, mortgages up to 105% of the home value will be eligible. Refinanced loans will be at a 30 or 15 year fixed rates with no penalties for prepayment or balloon notes. To find out if your mortgage qualifies, the White House Q&A website on the plan recommends contacting your lender on March 4, when the plan takes effect.
For those in more dire straits, the plan includes $75 billion to encourage lenders to modify owner-occupied first mortgages. According to the White House's website, homeowners need not be behind on their mortgages to qualify, but must be at risk of eminent default. If homeowners who modify stay current, they will get $1000 per year toward their mortgage for up to five years. As detailed in the Times report, such modification is optional for the lenders, who first must agree to modify the mortgage so payments are no more than 38% of the homeowner's income. From that point, the government would match, dollar for dollar, all reductions until payments are as low as 31% of homeowner income. As the White House website indicates, participating lenders are likely to modify interest rates on the mortgages, but at their discretion can include modification of the principal loan amount. Additional fees (paid by the government) would also encourage lenders to participate. Many lenders will identify and contact potentially eligible homeowners after March 4. If you do not receive a letter and believe your mortgage qualifies, contact your lender or a HUD approved housing counselor.
To help them maintain mortgage affordability going forward, the plan also calls for Fannie Mae and Freddie Mac to receive an additional $200 billion.
For "under water" homeowners whose lenders refuse to modify, the Obama plan offers to change bankruptcy rules so that judges can order loan modifications. As noted in a Fact Sheet released about the plan, to be eligible for such a "cramdown" modification (where the loan amount is lowered toward current home value), homeowners must have previously requested modification from their lenders. As noted by the Washington Post, such changes to the bankruptcy code would require legislation from Congress, where Republicans fiercely oppose it, as do financial services industry representatives.