New programs from the Obama Treasury Department will help borrowers refinance or modify their loans without bankruptcy. The plan even gives people options if their economic situation gets worse.
With housing prices falling fast around the country, the San Francisco Bay Area has not seen prices fall like this for decades, families everywhere are feeling the credit crunch. The Obama Administration’s program to make homes affordable again seeks to limit the amount people spend on their home to 31% of their gross income by allowing those who qualify to modify their loans.
The plan helps even those who want to refinance to take advantage of historically low interest rates, but can’t because they don’t have enough equity. Now those qualified can refinance even if they owe 105% of the value of their home on their first mortgage.
Below is a chart of the qualifications for the various options and the incentives provided by each.**
|
Program Option |
Qualifications |
Incentives |
|
Loan Refinance |
-The property must be owner occupied -The borrower must have sufficient income to support the new mortgage debt -The first mortgage may not exceed 105% of the current market value of the property -The conforming loan must be owned or securitized by Fannie Mae or Freddie Mac. |
-Access to historically low interest rates otherwise unavailable because of steep decline in home prices. -Reduced monthly payment that is more affordable now and in the future. -Increased ability to pay down principal instead of paying interest at the previously higher rate. |
|
Loan Modification |
-The loan must secure an owner occupied property of 1 – 4 units -An unpaid loan balance that is equal to or less than $729,750 for one unit, $934,200 for two units, $1,129,250 for 3 units, and $1,403,400 for 4 units. -The Loan must have been originated before January 1, 2009 -The mortgage payment (including taxes, insurance, and homeowners association dues) is more than 31% of the borrowers’ gross monthly income -The borrower has experienced a significant change in income or expenses, to the point that the current mortgage payment is no longer affordable |
-Reduction of loan payment to approximately 31% of borrower’s gross monthly income, achieved by first reducing the interest rate, then extending the term of the loan, and finally principle reduction. -Borrower incentives for timely payments on the modified loan up to $1,000 per year for the first five years. -Servicer incentives, including $1,000 for each modification of a delinquent loan and $1,500 for modification of a current loan, and up to $1,000 per year for each year the borrower remains current on their payments, limited to the first 3 years. -Investors receive a one time payment of $1,500 if they agree to modify a loan that is not delinquent as well as a subsidy for a portion of the cost to deduce the interest rate down to an affordable level. |
|
Short Sale or Deed-in-Lieu |
-Borrowers of the Loan Modification program who fail to qualify or go into default -Borrowers whose property fails the Net Present Value test of the Loan Modification Program |
-Borrowers are eligible for a payment of $1,500 in relocation expenses in order to effectuate these transactions -Servicers are eligible for a $500 incentive and can make a reimbursable payment of up to $1,000 to extinguish other liens. |
|
Bankruptcy Changes – if enacted*** |
-Debtors who qualify for Chapter 13 bankruptcy and own an unaffordable primary residence |
-Judicial modification of the home loan, including reduction of interest rate and reduction of principal |
This is only a summary and detailed information about each borrower is required to qualify for each of the program options. The precise details of the plan are available at www.FinancialStability.gov.
*** At the time of this posting, new bankruptcy legislation has passed one house of congress.
John L. Mlnarik, an attorney in Santa Clara,California, authored this post. Contact him at john@mlnariklaw.com.