Whether or not the recently announced $275 billion Homeowner Affordability and Stability Plan helps you largely depends on where you live and your particular situation. For starters the property MUST BE YOUR PRIMARY RESIDENCE; and your EXISTING loan MUST be a conforming loan, which among other things, means it MUST be LESS than $417,000. In some expensive metro areas, however, the limit was recently increased to $729,750. Keep in mind, however, these higher limits were, for the most part, introduced in 2008; so, if you bought your home more than 1 year ago, these higher limits will not apply to you. On the flip side, any loan that is not conforming is a non-conforming (also called jumbo) loan. To simplify, conforming = $417,000 or less and non-conforming/jumbo = greater than $417,000.
This week’s release was fairly general, but a more detailed plan is expected on March 4, 2009. The three phases of the plans are as follows:
1. Refinance Plan ($0 estimated cost to taxpayer): This plan is for people who are paying on their mortgage, but their home has lost too much value to qualify for refinancing. Conforming loans require 20% of equity in the home and many people have fallen below this threshold. To qualify under the plan, you MUST have a conforming loan, you must NOT be behind on your payments, and your mortgage must fall between 80% and 105% of your home’s current market value. To illustrate: if you have a $400,000 mortgage, your current value must fall between $320,000 and $420,000. The trick here is that your CURRENT LOAN must be a conforming loan. Good luck in high cost areas like LA, SF, DC, and NY where conforming loans used in new home purchases are rare. To put this in some perspective, in 2006, 60% of loans used to purchase a home (not refinance) in the SF Bay Area were non-conforming.
A second mortgage on your property will not disqualify you from this program. As long as the amount owed on the first mortgage is less than 105% of the value of property and the second mortgage lender agrees to remain in the second position, you may still qualify. Ultimately, the lender will want to see your ability to meet the payments on the new first mortgage.
The hope with this plan is that it will provide an opportunity for millions of families stuck in higher rate loans, to refinance into lower rate loans with zero cost to the taxpayer.
2. Loan Modification ($75 billion estimated cost to taxpayer): This plan is intended to help people whose mortgage payment is too high for their income. This could be due to an increased mortgage payment, loss of income, or both. This plan is open to people who are BOTH CURRENT and BEHIND on their mortgage. Just like the Refinance Plan, above, you MUST have a conforming loan. Lenders will be encouraged to cut monthly payments for troubled borrowers to 31% of monthly income, which most experts believe is a reasonable level. The goal is to reduce payments to manageable levels for borrowers whose income is not sufficient to make their monthly payments. The reduced payment is achieved through government provided lender incentives. Lenders are likely to lower payments mainly by reducing interest rates and the government will share partially in the cost of reducing the interest rates of these borrowers. Banks receiving TARP funds are strongly encouraged to work with borrowers, reducing principal if necessary, though that decision is ultimately left to the lender. The added risk to the lender is that, if the borrower files for bankruptcy, pending legislation may allow a judge to reduce the principal anyway.
3. The final part of the plan doubles the size of cash outlay to Fannie Mae and Freddie Mac, which the government hopes will restore confidence in those entities and help to keep interest rates low. The government will cover $200 billion in losses from Fannie Mae and Freddie Mac, which own or guarantee more than 60% of U.S. mortgage debt. They perform a very important part of the mortgage cycle because they purchase loans (conforming only) from banks, allowing the banks to receive money today (instead of 30 years from now), which in turn allows them to make more loans today. In other words, Fannie Mae and Freddie Mac inject liquidity into the mortgage market.
What is not covered by the plan:
1. Mortgages greater than $417,000 (limit is up to $729,250 in some high cost areas in ’08 and ’09)
2. Vacation property
3. Rental property, unless it is 2-4 units and you live in one of the units.
4. Second mortgages
