More Foreclosure Relief for Unemployed and Underwater Loans In Revised 2010 Mortgage Modification Plan

[Updated April 2010] With a weakening housing market and impending expiration of the home buyer credit, the Obama administration and Treasury have stepped up efforts to help struggling home owners facing foreclosure, including subsidies for the unemployed and borrowers who owe more than their home is worth.

The updated/revised plan would increase payments to lenders that modify second mortgages. Banks’ unwillingness to write down second liens has helped block efforts to prevent foreclosures, and prevented current programs from helping more home owners. The administration proposed allowing more mortgages to be refinanced into FHA guarantee programs if the borrower is current on the loan. The lender would have to cut the amount owed by at least 10 percent to less than the value of the home. The first and second mortgages combined would have to be no more than 115 percent of the home’s value. More than 15 million homeowners fall into this category, according to Moody’s Analytics. About 10 million of them owe at least 20 percent more than their house’s current value.

The Treasury plan will also help unemployed homeowners reduce mortgage payments for three to six months while they look for work. If homeowners don’t find a job in that time, or if they find a new job at a lower salary, they will be evaluated for further assistance.

Further under the new programs, existing incentives will be expanded for borrowers with FHA-guaranteed loans, and relocation assistance payments will be doubled for borrowers who have to move out of residences. Servicers will be required to consider principal write downs when modifying loans and the Treasury will offer incentives for principal reductions.

The revised plan and new programs will get additional funding from the $700 billion Troubled Asset Relief Program and money from $50 billion already set aside for housing programs. $14 billion will be allocated to the FHA guarantee programs.

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[Updated March 5th 2009] In its latest effort to stem the financial crisis and following on the heels of the recently approved $787 billion stimulus package, the Obama administration has announced details of a larger than expected $75 billion program to help up to 9 million “at risk” homeowners to restructure or refinance their mortgages to avoid foreclosure.

Foreclosures have skyrocketed during the mortgage crisis, with a total of 8.1 million homes, or 16 percent of all households with mortgages, at risk of falling into foreclosure by 2012, according to a Credit Suisse report in December. The National Association of Realtors said on Thursday that sales of foreclosed homes helped drag the median price of existing homes to its lowest level since 2003.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments,” President Barack Obama said in prepared remarks.

The Treasury plans to use part of the remaining $350 billion in a bank-bailout fund to fund the Homeowner Affordability and Stability Plan in order to lower foreclosures and defaults. Key elements of the plan include:

** See the first comment on this post for a list of FAQs around who qualifies for this program, income levels and dates when help will be available.

- Enable Up to 4 to 5 Million Responsible Homeowners to Refinance Conforming Loans guaranteed by Fannie Mae or Freddie Mac: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current refinancing rules, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing. Yet millions of responsible homeowners who put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to access these lower rates. The program will help those “responsible” families refinance, potentially reduce mortgage payments by thousands of dollars per year.

- Create A $75 Billion Homeowner Stability Initiative: This is aimed at reaching up to 3 to 4 Million At-Risk Homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate and the government would provide subsidies to the lender. This initiative will go solely to helping homeowners who commit to make payments to stay in their home – it will not aid speculators or house flippers.

- Mortgage payments for troubled homeowners will be subject to an affordability test. This approach would be different from other assistance programs, because borrowers would go through a standard eligibility test and could be approved before their mortgage becomes delinquent. The cost of the subsidies would be paid for by the government and mortgage servicers and with one approach under consideration, monthly housing payments by borrowers would be brought to as low as 31% of their pre-tax income.

- Pay for Success incentives : Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive incentives – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years. Further, to keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk
loans before the borrower falls behind.

- Incentives to help borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

- Allow Judicial Modifications of Home Mortgages during bankruptcy : Give bankruptcy judges more power to help borrowers keep their homes by being able to alter mortgage terms. Such a provision requires legislative approval on Capitol Hill, where lawmakers are considering legislation that would only let judges modify mortgages that existed prior to the enactment of the legislation.

- Provide $1.5 Billion in Relocation and Other Forms of Assistance to Renters Displaced by Foreclosure and $2 Billion in Neighborhood Stabilization Funds

- Strengthening Confidence in GSE’s – Fannie Mae and Freddie Mac: Treasury is increasing its Preferred Stock Purchase Agreements in the companies to $200 billion each from their original level of $100 billion each. Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.

Concerns homeowners who have paid on time or those who do not have a house will have with this plan:

- This plan leaves home owners who work hard to stay current on their mortgages out in the cold.

- Far too many incentives for lenders and rather than incentivize them to help home owners, they may get greedy chasing incentive bonuses.

- Many critics of government-funded mortgage modification argue that these kinds of programs have high re-default rates. The Office of the Comptroller of the Currency released statistics in December that showed a high re-default rate on mortgages that have been modified in the first two quarters of 2008.

What do you think? Will this plan work to stabilize our housing market and stem foreclosures over the long term?

Sources : Market Watch; Washington wire