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What is The Homeowner Affordability and Stability Plan?

One of the many questions that come to my mind, “Is this fair for a homeowner that is paying their monthly mortgage payments on time?”   The value of their homes are plummeting at the same rate just like everybody else.

You have probably heard that the administration announced today the details of a home foreclosure plan.

The Homeowner Affordability and Stability Plan is designed to offer assistance to as many as 9 million homeowners making a “good-faith effort” to stay current on their mortgage payments. The goal of this plan is to make the modification available and to make bankruptcy a last resort for homeowners.

Overview:

Mortgages are at historically low rates, but millions of families can’t shed their original home loans and refinance to take advantage. That’s because home values hav dropped significantly, and current rules prevent most homeowners from refinancing if they owe more than 80 percent of the value of their homes.

Getting a new loan at a better rate and perhaps getting out from under an adjustable rate mortgage that might have ballooned to a much higher percentage could save homeowners thousands of dollars annually. Those savings translate to a monthly payment that could make the difference between foreclosure and keeping a house.

So who’s eligle?

Homeowners who sought loans through or guaranteed by Fannie Mae or Freddie Mac, two lending institutions that recently got a huge infusion of federal funds funds to keep them afloat, will be able to refinance under this plan.

How Does the Homeowner Affordability and Stability Plan Work?

The new, refinanced loan can’t be more than 105 percent of the value of the existing home. For example, if your property is worth $200,000, you may qualify as long as you owe $210,000 or less.

Homeowners with second mortgages are also eligible, but with certain restrictions. The 105-percent rule remains in effect. The lender of the second mortgage, however, needs to agree to keep the loan in the “second position” when it comes to monthly payments. And homeowners still need to prove they can meet the payment terms of the new first mortgage.

An Example:

The Obama administration gave this example of how the plan would impact a homeowner paying back a 30-year fixed rate mortgage of $207,000, with an interest rate of 6.5 percent, on a house worth $260,000 at the time of the purchase.

Today, that homeowner still owes $200,000 on the original mortgage, but the value of that home has fallen 15 percent, to $221,000.

The drop in the home’s value makes the homeowner ineligible to refinance under current low interest rates, because most lenders generally require the borrower to have 20 percent home equity.

Under this refinancing plan, the rules are relaxed and a homeowner could refinance to a rate near 5.16 percent, reducing annual mortgage payments by more than $2,300.

Whoa, Nelly! What do you think is wrong with this example? Why couldn’t they provide an example that is a bit normal like in our Tampa real estate market.  Let’s say a $207,000 loan on a house worth $207,000 at the time of purchase. Today that homeowner still owes $200,000 on the original mortgage but the comparables have fallen to $110,000. Notice how I said comparables as opposed to market value. Market Value is a relative term in this market, depending on what is currently for sale in the neighborhood. All else equal (condition, square footage, upgrades), a bank-owned or short sale property in the same neighborhood will sell first. Until we keep the inventory of distressed sellers at a minimum, the true market value of your home is up in the air. The lenders and appraisers are using these properties as comparables, meaning your current home value just decreased significantly.

Source: White House

March 4, 2009 by Marc Vitorillo. Data is believed to be reliable, but not guaranteed. Login for current updates.