Mortgage Blog

Finally, - we have some details regarding the latest and greatest government plan to fix the housing market !!! Over the next few days you will hear news stories about it. As usual, most will be misleading, misinformed and wrong. Here are the latest details that I can dig up:

It’s called: “MAKING HOME AFFORDABLE” 

(no thats not a typo, someone flunked english class)

It is a “voluntary” program that rewards lenders to refinance or modify existing mortgages in order to decrease interest rate and payments for at-risk borrowers. This is primarily for homeowners that cannot refinance to today’s low rates due to lack of equity and/or income.

In order to qualify, the borrower must owe more than 80% of their current appraised value – up to 105%. It will not help anyone that owes more than 105% of appraised value. It will also not apply to anyone that has 20% or more equity in their home.

The existing loan has to be originally underwritten by Fannie Mae or Freddie Mac - this is not for sub prime loans or jumbo loans. It also applies to just 1^st loans, not second mortgages.

Borrowers must demonstrate that they have a financial hardship and will not have enough income to sustain payments in the future. Borrowers will be required to fully document income.

House has to be owner occupied

Sounds great, right? Here are some other details that make this a challenge to implement:

This program is “voluntary” for lenders. They don’t have to do this. They will receive $1,000 from the Treasury Department for every loan modification/refinance that is completed. And another $1000 per year for up to 5 years if borrower stays in home and continues to make on time payments.

The problem here is the lender/servicer has to use manpower to underwrite and prepare these modifications. Someone has to complete the paperwork, determine current value, etc… The $1000 up front fee is probably close to what it would cost the lender to complete the modification. That would be ok, except this is asking the lender to participate in a program that decreases the amount of interest that they collect from the borrower, (their profit). If a lender decreases the loan rate from 6% to 4% on a $200,000 loan, they will lose $4,000 per year in interest payments.

We have had similar programs implemented over the last year that have had good intentions that have fallen flat. I was skeptical of those programs then and I am skeptical of this one too. Don’t get me wrong, if this actually helps homeowners stay in their home and prevents foreclosures, and helps stabilize values for the overall housing market, I will be the first in line to admit I was wrong about this.

I just don’t see the real incentive for lenders to participate and I don’t know how many borrowers will actually fit into this tight range of requirements.

If you believe that you fall into this category, you should contact your existing lender directly, their phone number is on your mortgage statement – ask them what you need to do to qualify. This is not a program that a broker such as me can help you with. The link for more info is:

http://www.treas.gov/press/releases/reports/guidelines_summary.pdf

Several of my clients are applying for the program to see if they qualify. It will be interesting to find out how willing the lender is. I will keep you posted on the results.