Making Home Affordable

by admin on March 4, 2009

Today, March 24th 2009, the US Treasury released the “Making Home Affordable” guidelines. The plan is designed to help out between seven and nine million homeowners by allowing them to obtain reduced monthly mortgage payment. The plan will be divided into 2 categories:

Home Affordable Refinance Program: This plan is available for homeowners who have a strong track record on making their mortgage payments on a loan owned by Freddie Mac or Fannie Mae.

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.

GSE lenders and 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.

By not requiring an appraisal, this should really help homeowners get a refinance quicker and hopefully make it a smoother transaction for the lender or mortgage owner.

Home Affordable Modification Program: This program is scheduled to assist 3-4 million people who own homes by allowing them to receive a loan modification.

With the information now available, servicers can begin immediately to modify eligible mortgages under the Modification program so that at-risk borrowers can better afford their payments. The detailed guidelines (separate document) provide information on the following:

Eligibility and Verification
Loans originated on or before January 1, 2009.

First-lien loans on owner-occupied properties with unpaid principal balance up to $729,750. Higher limits allowed for owner-occupied properties with 2-4 units.

All borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship.

Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties.

Incentives to lenders and servicers to modify at risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default.

Modifications can start from now until December 31, 2012; loans can be modified only once under the program.

The first-lien loan limit of over $700,000 provides a large window for many people to take advantage of this loan modification program. It’s also important to note that loan modifications can start right away and will continue on for almost 3 year – though you are only eligible for one loan modification under this program.

Some detailed terms and procedures were explicitly called out in this new guideline. Mortgage servicers are required to work with all eligible loans under this program and each servicer will use a net present value test on each loan to compare the present value of cash flows with and without a loan modification. If the NPV test turns out to be positive, the mortgage servicer is required to modify the loan – this will be interesting to see how this plays out and is enacted as a working practice. The details of the NPV test are included in the guidelines and servicers should aim to get the monthly payment down to no more than 31% of monthly income levels.

A sequence of events was explicitly stated: #1 Modifcy the Interest rate (no lower than 2%), #2 Extend the loan term up to 40 years and #3 Adjust the loan principal amount downward. Before today #1 and #2 were being used in practice, it will be interesting to see if #3, loan principal amounts will really be adjusted significantly by lenders.

The government and the lender will have a sharing agreement on the costs associated with bringing a loan down from 38% of an individual’s monthly income down to 31%. The fees for loan servicers will be $1,000 up front for each modification, plus $1,000 per year for keeping the owner in the house.

Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years.

This is an interesting carrot for homeowners – work out a loan mod and you can continue to get principal reductions. If you are considering refinancing or getting a loan modification, done I encourage you to go and read the summary guidelines of this new Home Affordable Program, just released by the Obama Administration.

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