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President Obama unveiled the Homeowner Affordability and Stability Plan today. It’s safe to say that we don’t have all the details yet, but here’s what I know:
- As many as 9 million homeowners could be helped by this plan, the idea is to help prevent foreclosures and help families and in turn, communities.
- The plan contains three main components, and is limited to primary residences, which means speculators will get no help.
- The loans referenced in the plan cannot exceed Freddie Mac/Fannie Mae conforming loan limits.
- The first part helps homeowners who are suffering from falling housing prices who still have equity in their homes, but don’t have the 20 percent equity needed to refinance. Under the plan, homeowners who have conforming loans owned or guaranteed by Freddie Mac and Fannie Mae will be allowed to refinance their homes, even if they do not have 20 percent equity left in the house. The U.S. Treasury Dept. estimates that about 5 million homeowners will be helped by this portion of the program.
- The second part, known as the Homeowner Stability Initiative, is designed to assist homeowners who are “underwater” on their mortgages. The $75 billion initiative will bring together lenders, servicers, and the government so that all stakeholders share in the cost of the modification. Primary mortgages would be reduced to monthly payments that do not exceed a 38 percent debt-to-income ratio, with the lender assuming the costs. The government and lender then would split the costs of further reducing the monthly payments until they were at a 31 percent debt-to income ratio.
- Homeowners do not have to be delinquent to participate.
- The Homeowner Stability Initiative will create incentives for servicers, mortgage holders, and homeowners. Servicers would receive an up-front fee of $1,000 for every eligible modification meeting the initiative’s guidelines. Guidelines are scheduled to be released by March 4. Mortgage holders will receive an incentive payment of $1,500, and servicers $500, for modifications made on loans that are current but at risk of imminent default.
- Creating clear and consistent guidelines for loan modifications is one of the goals. The Obama Administration plans to work with federal agencies, banking and credit union regulators, and the private sector in order to develop loan modification guidelines that can be implemented across the entire mortgage market. While adoption of the guidelines will be voluntary for the private sector, all financial institutions receiving Financial Stability Plan assistance going forward will be required to implement the loan modification guidelines.
- The government estimates that between 3 and 4 million homeowners will benefit from the Homeowner Stability Initiative component of the plan.
- The third part of The Homeowner Affordability and Stability Plan is supporting low mortgage rates by strengthening Fannie Mae and Freddie Mac. The Treasury Dept. plans to increase their Preferred Stock Purchase Agreements with both Fannie Mae and Freddie Mac from its current $100 billion in both entities to $200 billion in each. The Treasury Dept. also will continue to purchase Fannie Mae and Freddie Mac mortgage-back securities in order to help promote stability and liquidity in the marketplace. Additionally, the Treasury Dept. will increase Fannie Mae and Freddie Mac’s portfolios by $50 billion, for a total of $900 billion. The Obama Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving home buyers, such as CalHFA. Funding for this will not come from TARP money but from the Housing and Economic Recovery Act.
There are many skeptics out there but I have to say, this appears to be a good start to solving a very complex problem.