What the Obama housing plan will, won't do |
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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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