mortgage

What the Obama housing plan will, won't do

President Barack Obama introduced a $75 billion homeowner relief program on Feb. 18. Who will it help?

Two sets of homeowners will be eligible to get help under the Obama administration's foreclosure-prevention plan:

  1. People who got plain-vanilla conforming mortgages,and who have never fallen seriously behind on the monthly payments might qualify to refinance at lower interest rates -- even if they owe as much as the house is worth.
  2. People who have subprime mortgages, or exotic loans such as pay-option ARMs, might qualify to keep their current loans, but have them modified to make the payments more affordable.

"The plan I'm announcing focuses on rescuing families who played by the rules and acted responsibly," President Obama said in announcing the Homeowner Affordability and Stability Plan, or HASP. "By refinancing loans for millions of families in traditional mortgages who are underwater or close to it, by modifying loans for families stuck in subprime 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."

The Obama administration estimates that HASP will help 7 million to 9 million families avoid hardship or foreclosure. But many won't be eligible to get help because of the limitations and exceptions in the plan.

Probably the biggest hole in HASP is that it won't help many people where house prices have fallen most: California, South Florida, Las Vegas and Phoenix. A lot of these people won't be eligible for refinancing because they owe much more than their houses are worth.

Another gap in the plan: It provides a path to refinancing for people whose loans were securitized by Fannie Mae or Freddie Mac. Millions of homeowners have mortgages that were securitized, but not by Fannie Mae or Freddie Mac. They might find it difficult to refinance, whereas their neighbors who got similar loans securitized by Fannie or Freddie might have an easier time qualifying for refinancing. Most borrowers won't know if they have a Fannie or Freddie loan until they ask the servicer.

The administration has set itself a March 4 deadline for getting the refinancing and modification programs rolling. On top of that, the administration wants to impose "clear and consistent guidelines for mortgage modifications" -- a task that has been occupying the mortgage industry's sharpest minds for months.

Refis and modifications

The plan has two main pieces: refinances for conforming loans, and modifications for subprime and exotic loans. The refinance piece is designed to help 4 million to 5 million "responsible homeowners."

Who are these responsible homeowners? They:
  • Haven't fallen behind on their monthly payments.
  • Owe more than 80 percent of their homes' currently appraised value.
  • Owe no more than 105 percent of the currently appraised value.
  • Have mortgages that are owned or guaranteed by Fannie or Freddie.

That last requirement effectively imposes a limit on loan amounts. Few mortgages for more than $417,000 will qualify for refinances, because that is the conforming limit.

Also, a mortgage that's deeply underwater wouldn't be eligible for refinance. An example of a hypothetical loan illustrates why:

Let's say someone in South Florida borrowed $310,000 to buy a $350,000 house a few years ago. Now the house has lost one-quarter of its value, and is worth $262,000. The owner still owes $300,000, or about 115 percent of the appraised value. That's far more than the 105 percent limit. The owner wouldn't be able to refinance without coming up with about $25,000 cash to bring the loan balance down to 105 percent of the home's value.

If you think that's complicated, wait until you get a look at the mortgage modification plan for people with subprime or exotic loans. Under this plan, the lender would have to reduce the interest rate until the monthly principal and interest payments are no more than 38 percent of the borrower's before-tax income.

After reducing the rate to get to that point, the federal government and lender would kick in equal amounts to the monthly payments to reduce the borrower's debt-to-income ratio from 38 percent to 31 percent. The lower interest rate would stay in place for five years, then would rise in steps until it met the prevailing conforming rate on the date of modification.

There's a missing piece here. The plan addresses borrowers' housing debt to income, but not total debt to income. Some homeowners are too deep in debt on their credit cards and car loans, in addition to owing too much on their houses. The White House is aware of this oversight, says Josh Denney, lobbyist for the Mortgage Bankers Association. He says that if a borrower's total debts exceed 55 percent of income, he or she will have to get credit counseling before being eligible for a modification.

Another issue that was not addressed initially in the Obama plan is what to do about second mortgages -- home equity loans and lines of credit. A borrower can't refinance a primary mortgage without getting permission -- called a resubordination -- from the equity lender. "I think they're just going to have to agree to resubordinate," Denney says -- especially in cases where the equity lender accepts federal bailout money.

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