President Obama’s Home Affordability and Stability Plan & related loan modification developments
Following below is a brief, preliminary summary of the Obama administration's Homeowner Affordability and Stability Plan:
Continuing recent deterioration in various sectors of the U.S. economy and the decline in the housing market have created devastating consequences for homeowners and communities nationwide.
Millions of responsible working families who make their monthly mortgage payments and fulfill their obligations have seen their property values fall, and they are now unable to refinance at lower mortgage rates as a result of declining values in the housing market.
Many homeowners have lost their jobs or have experienced income reduction and are now under tremendous pressure to stay current on mortgage payments. Millions of American homeowners are now at-risk and are facing possible foreclosure, with at-risk households that now include good credit (prime) borrowers.
On March 4, 2009 President Obama's Homeowner Affordability and Stability Plan "Making Home Affordable" program took effect. The Homeowner Affordability and Stability Plan (the “Plan”) is part of the President's comprehensive strategy to rejuvenate and provide certain support for the U.S. economy. The plan’s objective is to provide support to 7 to 9 million responsible homeowners so they can restructure or refinance their mortgages and avoid foreclosure through low-cost financing and keep their homes.
The homeowner stability initiative has a simple goal: In a shared effort, lenders would reduce the amount homeowners owe each month to sustainable levels.
Historically, sustainable housing payments levels should be no more than 31% to 38% (ratio) of the homeowner’s gross income. The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income.
A “ratio” is the way the banks determine if borrowers can afford to maintain the mortgage payment. If a ratio is too low, that can mean that applicants are not facing a severe enough financial hardship situation and do not need a loan modification. If a borrower’s ratio is too high, then the lender is likely to consider him or her a risk for default in the future. The federal program implemented by President Obama aims for a 31 percent modified payment, including taxes, insurance and homeowners’ dues. This means a new, modified mortgage payment would be reduced so that it would equal just 31 percent of the borrower’s gross income. Many lender guidelines have traditionally allow for an acceptable range between 38-45 percent ratios for their proprietary loan modification programs.
The Treasury Department (“Treasury”) intends to partner with financial institutions to reduce homeowners’ monthly mortgage payments. The lender will have to first reduce payments on mortgages to no greater than 38% Front-End Debt-to-Income (DTI) ratio. The Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31% Front-End DTI ratio for the mortgage borrower.
The lower interest rate and payments (at the new 31% PITI ratio) must be kept in place for at least five years, after which it could gradually be stepped up to the conforming loan rate (at the 38% PITI ratio) in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal and value.
To encourage lenders to modify more mortgages and enable more families to keep their homes, the Obama Administration, along with the FDIC, recently introduced an innovative, partial guarantee initiative. The insurance fund, to be created by the Treasury Department, at a size of up to $10 billion, will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index. It is anticipated that there will be further developments for uniform guidance for loan modifications across the mortgage industry.
In recent downward economic trends, neighborhoods have experienced stress as each foreclosed home can reduce neighborhood property values. The homeowner stability initiative is structured to prevent the decline in neighborhood values due to defaults and foreclosures.
Present-day mortgage rates are at historically low levels, providing homeowners opportunity to reduce monthly payments, through low-cost refinancing. However, under recent guidelines and with the continuing, tight credit market conditions, most homeowners, who owe more than 80 percent of the value of their homes, continue to experience difficulty in securing refinancing. Moreover, millions of responsible homeowners, through no fault of their own, have seen the value of their homes decrease, making them ineligible for today's low interest rates. The recent home stability initiative hopes to help at-risk homeowners refinance into more affordable loans. The initiative could reduce mortgage payments by thousands of dollars per year and help committed homeowners stay in their homes– providing families with security and neighborhoods with stability. The initiative is, however, not intended to aid housing speculators.
The homeowner stability initiative also sets aside $1.5 billion in relocation and other forms of assistance to renters displaced by foreclosure and allocates $2 billion in neighborhood stabilization funds.
The influx of funds hopes to stabilize home values in various communities across the U.S. When a home goes into foreclosure, the entire neighborhood depreciates due to neighborhood property appraisals and value averaging.
Additionally, the Homeowner Affordability and Stability Plan hopes to bolster the U.S. economy by improving and undergirding programs, such as FHA, through increased funding for low mortgage rates to build confidence in Fannie Mae and Freddie Mac.
Increased funding already authorized in 2008 by Congress, was further intended to support Fannie Mae and Freddie Mac in carrying out efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the economy.
In addition, it is contemplated that the U.S. Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity by (i) increasing the size of mortgage portfolios by $50 billion to $900 billion – along with (ii) corresponding increases in the allowable debt to ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing challenges in the U.S. housing market.