Understanding The Housing Recovery Plan

We have gotten a lot of calls about what President Obama’s Housing Affordability and Stability Plan really means. Based on our research, I’ve summarized what we’ve learned so far. At this point, not all of the details are available as they still seem to be working them out.

I’ve tried to keep this summary as simple and basic as possible. Why? The more we read in the press, the more complex and unclear the plan seems to be. I’ve also tried to limit the overview to the situations most common with the families that call our office daily.

Keep in mind that if your house has already gone to the foreclosure sale (i.e. you are in the “redemption period”) none of these options are available to you.  Your only options during the redemption period is to pay off your loan(s) in full, or to sell via a short sale.

There are two parts to the plan: Affordability and Stability

Affordability

This portion of the plan will give you a chance to refinance your mortgage to current interest rates, thereby making your payments more affordable. If you are currently facing high interest rates following an adjustment in your ARM (adjustable rate mortgage) interest rate, this will give you a chance to switch to a lower fixed rate mortgage. This is awesome news, but watch out for the “gotchas”.

Do You Qualify under the “Affordability” Portion of the Plan? (check this government web site for more)

  • You must have a mortgage guaranteed by Fannie Mae or Freddie Mac.
    • Call us and we’ll help you figure out if this is the case for your loan. If it’s not, you can not participate.
  • You must owe between 80% and 105% of your house’s current (in today’s market) value.
    • This is a HUGE gotcha for almost everyone we talk with. Why? Because if you financed your house at 100% sometime over the last 5 years, the value has likely gone down drastically here in Michigan and you will owe more that 105% of the current value. If you are like most people that call us, this will eliminate this option for you.
  • You must be current on your payments. “Current” means that you haven’t been more than 30-days late on your mortgage payment in the last 12 months.
    • Yet another HUGE gotcha. This portion of the plan will not help you if you’ve fallen behind already.
  • Your interest rate will be a current “market” rate (which may actually raise your payment in some cases).
  • If you have mortgage insurance (like “PMI”), the insurance company must agree to insure the modification of your loan.
  • Additional restrictions apply if you have a 2nd mortgage (call us for details)
  • Your lender does not have to participate!
  • If you owe more than 105% of the current value or if your loan is over $417,000, you will not qualify for this portion of the plan.

Stability

This portion of the plan will help you if your payments have risen to 40% or more of your monthly income. Your lender is being given financial incentives from the government to participate in this program, but they have a choice: Your lender does not have to participate!

Do You Qualify under the “Stability” Portion of the Plan? (check this government web site for more)

  • If you owe more than your house is worth (I have not seen a definition of this yet).
  • If your debt to income ratio is “high” (I have not seen a definition of this yet).
  • You must still live in the house (if you don’t, you will not qualify)
  • If you owe under $417,000
  • If you qualify: Prove you can afford the new payment (plus your 2nd mortgage – see below) at an interest down to no more than 2%.
  • If you didn’t lie about your income when you received your current loan (remember those crazy “no doc” loans?)

The major tool for reducing the payment is rate reduction, with balance reductions only a last resort.  So if you’re “upside-down”, you will remain that way.

Additional details on this portion of the plan are mostly speculative at this point.

There is a major problem with this portion of the plan:  The $75 Billion allocated for this is to give incentives to first mortgage holders, not second mortgage holders.  So, say your first mortgage is offering a loan modification that works for you.  They are doing this because of the money they will get from the government.  What about your second mortgage?  Will you still be able to make that payment?  If not, they won’t just “go away”, they’ll want to get paid.  Because this portion of the plan does not allocate funds to second mortgages holders, you still may not be able to make your total mortgage payments.

Remember, at this point, the guidelines are not finalized and the two things are clear: You need to qualify (these programs will not help everyone) and your lender does not have to participate. Don’t waste your time hoping these programs will help you if you learn now that they will now. Based on the restrictions, you still may end up looking dead ahead at a Michigan foreclosure. If that’s you, we can still help by getting you out from under it so you can make a fresh start. Call us to learn about all of your options.

Joel

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