I received this information from a CATIC email blast and thought it was worth sharing with my clients and new visitors. The Obama Administration recently announced a number of measures to help homeowners avoid foreclosure. The following summarizes those programs.

INTRODUCTION

On March 4, 2009, the Obama Administration unveiled two new plans to help up to 9 million borrowers stay in their homes with refinanced mortgages that are modified to lower monthly payments. This blast e-mail will summarize the two new programs and provide you with links to U.S. Department of the Treasury guidelines for the programs.

HOME AFFORDABLE REFINANCE PROGRAM

The first of these programs is The Home Affordable Refinance Program. It is estimated by the government that this program will be available to help 4 to 5 million homeowners. Participation in the program will be limited to those borrowers who have been making payments on an existing mortgage owned by Fannie Mae or Freddie Mac. Borrowers who have been more than 30 days late on a payment in the last 12 months will not qualify. To finance this effort, the Treasury is providing Fannie Mae and Freddie Mac with up to $200 billion in additional capital, on top of $200 billion that it had already pledged to them. Key features include:

Additional Flexibilities: Most borrowers refinancing an existing Fannie Mae or Freddie Mac loan will not be required to buy new or additional mortgage insurance if the loan at the time of the refinance is more than 80 percent of a home's value. Any existing mortgage insurance may be carried forward to the new loan. In addition, Fannie Mae and Freddie Mac can refinance loans up to 105 percent of a home's value with this new flexibility, so even borrowers who are "underwater" -- who owe more than their home is worth -- may be able to refinance. This will expand the number of borrowers able to take advantage of lower interest rates that reduce monthly payments, or refinance into a more sustainable mortgage.

Eligible borrowers can use this program to improve their position for long term homeownership success by reducing their current mortgage interest rate or shortening the amortization term. Similarly, the Relief Refinance Mortgage can be used to replace an adjustable rate mortgage, with a 15, 20 or 30-year fixed-rate mortgage. Existing liens must continue to be subordinate to the Relief Refinance Mortgages.

Lenders will not have to re-underwrite a borrower if the Relief Refinance Mortgage raises their monthly principal and interest payment by 20 percent or less. But, in cases where the change in monthly principal and interest payment is more than 20 percent, borrowers will be underwritten through a simplified process. Borrowers will need to prove the ability to afford the new mortgage debt.

The program will only be available for a limited time. Applications can only be made on or after April 1, 2009 and the mortgages must be originated by June 10, 2010.

HOME AFFORDABLE MODIFICATION PROGRAM

The second of these programs is the Home Affordable Modification Program. It is estimated by the government that this program will be available to 3 to 4 million at-risk homeowners to avoid foreclosure by reducing monthly mortgage payments. The cost for this program is $75 billion.

Eligibility: Anyone with a high combined mortgage debt compared to income (mortgage payments, including taxes, insurance and homeowners association or condominium fees, have to be more than 31% of pretax monthly income) or who is "underwater" may be eligible for loan modification if the loan was entered into on January 1, 2009 or earlier. Delinquency will not be a requirement for eligibility. Only owner-occupied homes qualify and mortgages for single family properties that are worth more than $729,750 are excluded. Finally, borrowers with high total debt (which includes not only housing debt but other debt) equal to 55%, or more, of their income qualify, but only if they agree to enter HUD-certified consumer debt counseling program. All borrowers must fully document income by signing an IRS 4506-T Form, submitting their most recent tax return, two most recent pay stubs and must complete an affidavit of financial hardship. Modifications can start on March 4, 2009 until December 31, 2012 and the loans can only be modified once. Borrowers cannot be charged any modification fees. Lenders will have to bear the administrative cost of this program.

The key to determining whether a person receives help will be a so-called net present value calculation by the lender. The lender will first have to calculate how much it would cost to reduce a person’s monthly payments to an "affordable" range, 31 to 38 percent of the borrower’s gross monthly income. If the calculation shows that the lender’s cost in modifying the loan, after receiving the taxpayer subsidy, would be lower than the cost of foreclosing, the lender would have an incentive to take part in the program.

Loan Modification Terms and Procedures: The U.S Treasury Department is planning to partner with financial institutions to reduce borrower’s monthly payments. Under the program, the lender will first have to agree to lower the interest rate on mortgages so that the borrower’s monthly mortgage payment is no greater than 38% of his or her income. The lender can do this by lowering the interest rate (but not lower than 2%) first. If that does not reduce the mortgage payment to no greater than 38% of income, the lender can extend the term of the loan up to a maximum of 40 years, and then, if necessary, forgive principal.

The program will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower. Lenders will be required to keep the modified payments in place for 5 years. After that point, the interest rate can be gradually increased by 1% per year to the conforming loan survey rate in place at the time of the modification.

Servicers will receive an up-front fee of $1,000 for each eligible modification. Servicers will also receive "pay for success" fees awarded monthly, as long as the borrower stays current on the loan, of up to $1,000 each year for three years. Mortgage holders will be eligible for an incentive payment of $1,500 and $500 for servicers for modifications made while a borrower at risk of imminent default is still current.

To provide an extra incentive for borrowers to keep paying on time under the modified loan, the initiative will provide a monthly balance reduction payment of up to $1,000 each year for five years. This sum will be used to reduce the principal balance on the mortgage loan.

To encourage lenders to modify more mortgages, the Administration, with the FDIC, has developed an innovative partial guarantee program (at a cost of up to $10 billion). These dollars provide a measure of security to lenders by assuring that if home price declines are worse than expected they have access to reserves. Holders of modified mortgages under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.

CONCLUSION

Experts estimate that when a lender forecloses on a property it loses up to one-half of the value of the loan. In this economic climate, with house prices falling rapidly the loss could be greater than that. Because of this, there is certainly an incentive for lenders to enter into the Home Affordability Modification program.

Another incentive for lenders to embrace this program is that Chapter 13 "cram down" legislation is currently pending in Congress and appears to be gaining momentum. This legislation would allow bankruptcy judges under a Chapter 13 filing to reduce the principal owed on a mortgage loan as part of the bankruptcy. The House passed this legislation on March 5th.

Please click on the links found below for more information:

Borrower Information: Making Home Affordable 
Fact Sheet 
Summary of Guidelines 
Modification Program Guidelines 
Counselor Q&A