Homeowner Stability Plan Begins

For millions of troubled homeowners, help may finally be on the way. On March 4 the U.S. Treasury Dept. is expected to begin implementing the Obama Administration’s $75 billion, Homeowner Affordability and Stability Plan.

The Obama plan, originally announced on Feb 18, aims to keep some five million owners in their homes by streamlining the process of modifying troubled loans. The plan addresses some of the major obstacles that homeowners have faced when trying to avoid foreclosure. Mortgage servicers—the companies that process payments on behalf of the ultimate owners of the loan—will now have a financial incentive to change the terms. They’ll get paid $1,000 per loan modification. Government funding could knock as much as three percentage points off of the rates borrowers pay. The Treasury may announce more details on rates tomorrow.

The biggest change is the introduction of a simple formula for calculating monthly payments. In the past, banks tried to help borrowers who had fallen behind by tacking missed payments onto the principal of the loan. That did not reduce the monthly payments. As many as half of all borrowers who get put in such payment plans end up defaulting again. Under the new program, mortgages will be restructured so that home payments account for no more than 31% of the borrower’s monthly income. All debt payments, including car loans and credit cards, will be no more than 55% of pre-tax income.

Under the current plan, borrowers will not have to be late in their payments to qualify for a loan modification. Borrowers who are “underwater,” i.e. they owe more than their house is worth, will also be allowed to refinance so long as their first mortgage does not exceed 105% of their home’s value. Previously only borrowers with at least 20% equity in their homes could refinance. The real estate Web site Zillow.com estimates that only about 25%—or 14 million borrowers—have home values high enough to support refinancing under the new program terms. Borrowers seeking help negotiating with lenders will be encouraged to use counselors approved by the U.S. Dept. of Housing and Urban Development (HUD). These non-profit firms, such as NeighborWorks America, the Neighborhood Assistance Corporation of America, Acorn, Catholic Charities and the Urban League, are paid by the federal government to run programs for homeowners in trouble. They typically contract with hundreds of other counseling services across the country, both to negotiate new loan terms and counsel borrowers on overall household budgeting. Their services are free. “If you’re paying for foreclosure prevention services, you shouldn’t be,” says Douglas Robinson, a spokesman for NeighborWorks.

The Obama plan will not address all homeowners in trouble. Only loans insured or owned by Fannie Mae and Freddie Mac will be part of the program. Borrowers can call their lender and find out if that is the case with their loan. Many borrowers unlikely to benefit are those who took out “jumbo” loans when the old limit was $417,000 as well as those with poor credit who took out toxic subprime loans which Fannie and Freddie did not insure. The government-run Web site, financialstability.gov, will have more information about the program.

The plan also doesn’t does not address borrowers who have no income, such as those who have recently been laid-off. Citigroup announced on March 3 that it would lower payments to $500 a month for three months for borrowers who have lost their homes. Other banks may follow.

The Treasury is also expected to unveil a formula that will help lenders decide if it makes sense to foreclose on the property or work out some kind of modification with borrowers. The formula will be based on the net present value of the home, with discounts applied to the expected loss a bank would take in a foreclosure. “That kind of rational analysis is exactly what’s needed,” says Austin King, who heads housing related issue for the advocacy group Acorn. “There has never been a consensus. There are so many foreclosures that make no sense.”

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