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A Look at the Homeowner Affordability and Stability Plan
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A Look at the Homeowner Affordability and Stability Plan
NATION - 3/10/2009
By Steve Combs - Special to TheBAYNET.com
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EDITORS NOTE: Steve Combs is mortgage specialist who, at the request of TheBAYNET.com, broke down the hundreds of documents included in the president’s new Homeowner Affordability and Stability Plan for TBN readers. Combs may be reached via his web site: www.Steve-Combs.com. On March 4, the Department of Treasury released new details of the Homeowner Affordability and Stability Plan, announced by President Obama on February 18. Designed to help between seven to nine million families avoid foreclosure, the plan has three main components, two of which directly address struggling homeowners.
The Home Affordable Refinance Program is aimed at homeowners who have less than 20 percent equity in their home or owe more than their home is worth. The Home Affordable Modification Program addresses borrowers at risk of losing their home because their payments are too high.
It's important to note that only loans insured or owned by Fannie Mae and Freddie Mac with unpaid principal balances of up to $729,750 for a single principle residence will benefit from this program.
The final part of the President's plan creates an additional $100 billion in support for government-sponsored enterprises Fannie Mae and Freddie Mac, to help increase lending and reduce mortgage interest rates. These insurance payments, linked to declines in the home price index, would compensate lenders if home price declines are higher than expected.
Opponents of the plan suggest that this is simply an extension of the Hope For Homeowners plan of 2008, which was ineffective because of the voluntary nature of the program. The new plan does not address homeowners with negative equity or borrowers with sub-prime, Alt-A, and jumbo mortgages, borrowers most vulnerable to foreclosure. Opponents also wonder how an increase in risk for GSEs won't lead to increases in fee rates – not to mention how mortgage insurance and second mortgages fit into the process. Others suggest that the government, since new mortgage terms will stay in place for five years, is in essence offering a five-year ARM that will cause a similar market "melt-down" in the future. Finally, industry opponents of the program wonder what role, if any, mortgage professionals will have in this execution of the plan if investors don't participate in or purchase loans originated with DU Refi Plus.
Proponents of the plan suggest that, even though participation in the President's new plan is still voluntary, lending institutions that benefit from the TARP could be required – or at least feel serious pressure – to participate. In addition, the plan will also create a standard industry practice for mortgage modifications required by all participating lenders, and the government will offer new monetary incentives for borrowers, lenders, servicers, and investors in an effort to attract more participation. The Treasury will also create a $10 billion Insurance Fund to provide partial guarantees to lenders.
Some suggest that, in lieu of mandatory lender participation, bankruptcy laws will have to be amended to protect lenders from lawsuits in order to significantly increase their participation. Obama was in favor of bankruptcy law modification as part of the plan, however, this kind of change requires brand new legislation from Congress.
Here are some quick highlights of the three programs:
1) The Home Affordable Refinance Program, which ends in June 2010, will reportedly help up to three to four million at-risk homeowners avoid foreclosure. The bill will remove the current restriction on Fannie Mae and Freddie Mac that prohibits them from guaranteeing refinancing on mortgages valued at more than 80 percent of the home's value. This will allow many more homeowners to refinance at lower rates. The program could help homeowner-occupants who are current in making loan payments and have loan-to-value ratios (LTVs) above 80 percent but not more than 105 percent. Cash-out refinances are not permitted.
2) The Home Affordable Modification Program: Under the modification program, which ends on December 31, 2012, participating loan servicers will be required to evaluate mortgages at risk of default to determine if they qualify for the program. If so, the program provides incentives for lenders to modify the terms of the loan. Participating lenders will reduce payments to no more than 38 percent of borrower's income, with the government matching further reductions down to 31 percent by reducing the interest rate to as low as 2 percent for five years, extending terms up to 40 years, and forgiving part of the principal.
3) Increased Support for the GSEs: The plan provides additional support for the GSEs, including doubling of potential Treasury investment from $100 billion to $200 billion for each GSE, to maintain their positive net worth.
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