3/01/2009

Obama's Housing Plan: What's in It for You

Updated on February 25, 2009.

PRESIDENT OBAMA'S $275 BILLION foreclosure-prevention plan, also known as the Homeowner Affordability and Stability Plan, is just days away from official take-off, with the program’s final rules about to be publicized and implemented March 4.

Among the president's lofty goals: to enable four to five million homeowners to refinance into more affordable fixed-rate mortgages and to spend a whopping $75 billion to help another three to four million at-risk homeowners keep their homes.

According to the Obama administration, loan modifications may help some households save as much as $400 a month, while certain incentives and payouts will give others $1,500 in cash and up to $5,000 towards their loan balance. Of course, there are also plenty of homeowners that won’t see a dime.

Here’s what you can expect.

1.Greater ease to refinance into lower-interest loans

Promised results: Lower-rate mortgages that could save some homeowners up to $200 per month

What the plan proposes: Many homeowners are "underwater" on their mortgages -- meaning they owe more on their home than it's actually worth. Given that many lenders today won't refinance a mortgage if the borrower owes more than 80% of the value of their home, a lot of people are stuck in their existing mortgages. Obama's plan will enable borrowers to refinance into lower-rate loans worth up to 105% of the property’s current market value.

Who benefits: According to the administration, four to five million homeowners. More specifically, the plan will only help those who have conforming loans (up to $417,000 in most parts of the country, but they can be as high as $729,750 in some high-cost counties in states like New York and California). Those who have jumbo loans that exceed those limits don't qualify.

What you could receive: The administration calculates that someone who owes about $200,000 on a house that is worth $221,000 today and refinances a 6.5% loan into a 5.17% 30-year-fixed loan would save $2,300 a year, or $191 a month.

Final verdict: The government’s calculations are missing the mark, says Keith Gumbinger, vice president of HSH Associates, a mortgage-information research firm. The household in the example above owes less than their home is worth. “They could have gotten a loan anywhere on the private market,” Gumbinger says.

Homeowners who are truly in trouble, such as those in Florida, California, Nevada, Arizona, where prices have fallen by 30% or more, will likely not qualify, says Polina Vlasenko, a research fellow with American Institute for Economic Research, a think tank.

2.Reduced payments for at-risk borrowers

Promised result: Savings on monthly mortgage payments of up to $400 per month

What the plan proposes: Reducing monthly payments for borrowers at risk of losing their home so that payments only comprise 31% of their household income. The reductions will be made by lowering a borrower’s interest rate and will be partly subsidized so lenders don’t have to absorb all costs.

Who benefits: Unlike all the other rescue programs in place so far, this $75 billion Homeowner Stability Initiative will help homeowners who are current on their payments but facing an “imminent” threat of falling behind. The administration estimates that three to four million borrowers may benefit. Only mortgages on primary loans qualify. Those who took loans to purchase investment properties are out of luck.

What you could receive: The administration estimates that a household with a $220,000 mortgage and payments adding up to 43% of monthly income could save over $400 per month after their payment is reduced to 31% of their monthly income.

The verdict: Reducing payments to 31% of household income is a step in the right direction, but it doesn’t address the principal balances of loans that are underwater, says Jim Karr, chief operating officer at the National Community Reinvestment Coalition, a consumer advocacy group. In areas where homeowners owe as much as 25% or 30% more than their homes are worth, an affordable payment may not be incentive enough to keep them in their homes. Also, these modifications are temporary, Karr says. “The question is what’s going to happen in five years if interest rates drift back up,” he notes.

3.Cash incentives for those displaced by foreclosure

Promised result: Up to $5,000 in incentives for staying current on payments and possibly another $1,500 to modify your loan.

What the plan proposes: The government is handing out monetary incentives left and right to make sure servicers are modifying loans -- and that homeowners are staying current on their payments.

Who benefits: Servicers will receive an upfront fee of $1,000 for each eligible modification they complete plus “pay for success” fees of up to $1,000 a year for three years, as long as the borrower stays current on the loan. Another $500 payment will be awarded to each servicer that modifies an at-risk loan before the borrower falls behind.

Borrowers, meanwhile, could receive a $5,000 incentive for staying current on their modified loan. The payment, in increments of up to $1,000 a year for five years, will be applied towards reducing the principal balance of their loan. In addition to that, homeowners who are at risk of falling behind and who modify their loan before they fall behind will receive $1,500.

Renters displaced by foreclosure will receive $1.5 billion in assistance to help them relocate, among other things.

The verdict: A $5,000 incentive applied over five years to a loan that may be upside down by $30,000 or $40,000 is not much of an incentive, says NCRC’s Karr. And while it may sound significant to a homeowner who owes $75,000, someone with a $300,000 mortgage may not be much impressed. But the administration has done a great job of encouraging servicers to modify loans -- and to do so with terms homeowners can afford for the long term. (Or for three years, at least.) “Servicers come out the big winners here,” Karr says.

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