Obama's "Making Home Affordable" Programs

Two new government programs will help nine million homeowners make their home mortgages more affordable.  It is designed to prevent the destructive impact of foreclosures on families, communities and the national economy.  The Home Affordable Refinance program deals with existing mortgages owned by Fannie Mae and Freddie Mac.  The other program, the Home Affordable Modification program, is a voluntary program providing incentives to lenders in the private sector that modify home loans for at-risk homeowners to avoid foreclosure by reducing monthly mortgage payments. 

Home Affordable Refinance Program - The Home Affordable Refinance program will be available to four to five million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac.  Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%.  Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.  Lenders and loan servicers already have much of the borrower’s information on file, so documentation requirements are not likely to be burdensome.  In addition, in some cases, an appraisal will not be necessary.  This flexibility will make the refinance quicker and less costly for both borrowers and lenders.  The Home Affordable Refinance program ends in June 2010.

Home Affordable Modification Program - The Home Affordable Modification program will help up to three to four million at-risk homeowners avoid foreclosure.  Monthly mortgage payments will be lowered by reducing the interest rate to the current levels or by stretching the payments to 40 years instead of 30.  The total principal amount repaid remains the same, but the borrower pays less interest or takes longer to pay off the mortgage.  This is a voluntary program.  Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications.  This program will work in tandem with an expanded and improved Hope for Homeowners program.  This program applies to:

• Loans originated on or before January 1, 2009;

• First-lien loans on owner-occupied properties; and

• Unpaid principal balances up to $729,750. (Higher limits allowed for owner-occupied properties with 2-4 units).

Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of the borrower’s gross monthly income.  You may even qualify for a new affordable loan if you are already in foreclosure.  Follow the steps below to determine if the 31% of monthly income criteria will qualify you for a new affordable loan.

Step 1 - Add up your annual income and divide by 12 to determine your monthly income.

Step 2 – Multiply the monthly income by 0.31 to determine the maximum payment you can have without exceeding the 31% criteria. 

Step 3 – Consult a loan amortization table based on the current interest rate and determine the loan principal for the monthly payment determined in step 3.  There are also numerous mortgage calculators available online that can help with this step. 

Step 4 – If your current loan is less than the amount determined in step 3, then you will probably qualify and should contact your lender to see if they are participating in this voluntary government program.    

Example:  Your annual income is $40,000, and the current mortgage interest rate is 5.25%.  The $40,000 annual income equates to a monthly income of $3,333 ($40,000/12).  The maximum mortgage payment you can have under this plan is $1,033 ($3,333 x .31).  Based on the 5.25% interest rates determined from a mortgage table or online calculator, the $1,033 monthly payment will support a $187,000, 30-year mortgage.  If your current mortgage balance is at or less than that amount, you will probably qualify for the program and should contact your lender to see if they participate in the program.

The table below illustrates the qualifying mortgage payments and resulting loan amounts based on 5.25% interest rates (the current rate at the time this article was written) and several levels of income.  Results illustrated will vary with different interest rates.

If, after cutting your rate and stretching out your payments, you still don’t have enough income to meet that 31% threshold, the plan probably won’t work for you.

Many homeowners have mortgages larger than the value of their home.  Some lenders, in lieu of foreclosure, are willing to negotiate a reduction of the principal rather than incur the costs associated with foreclosing and reselling the property.  Think about it; they will lose the drop in home value either way.  However, you will have to show that you will be a reasonable credit risk after the reduction of principal.  Contact your lender and see if they have a program like this available.

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