Ten days ago, the Treasury Department announced two housing programs for households having difficulty paying their mortgages. The programs target two different groups:
--those who could handle payments if only they could refinance to today's low interest rates, but can't because their first mortgage is more than 80% of the current value of their home, and
--those who need more drastic action--a modification to their loan terms--to stay in place.
The refi program is called Making Home Affordable and the loan modification program is called (drumroll) the Home Affordable Modification program. Both help only owner-occupants; neither will help those who realistically can't afford the house they own, even with near-term assistance.
The Making Home Affordable Program
To qualify for the refi program, owner-occupants must:
--owe no more than $729,750 in a first mortgage on the home;
--that loan must be owned by Fannie Mae or Freddie Mac (see this site and this site to see if Fannie or Freddie owns your mortgage);
--that first mortgage must be no more than 105% of the current value of the home (for instance, it might be $105,000, on a home now worth $100,000--until 3/4, your loan amount could be no more than $80,000 on a home now worth $100,000. That change in policy is huge.).
Because lenders already have most of the info they'll need to review a refinance request, it's assumed that the refi program will go into production very quickly.
A client told me recently that Countrywide offered a similar interest rate reduction after just a brief, proactive ''I don't have a problem now but may have one in the future; what should I do?'' call. And that was a month ago. I've heard estimates that a short sale or default typically costs a lender a minimum of $50,000, so a judicious refinance may create big savings over that possibility.
The program currently is scheduled to lapse in June, 2010.
The starting point is a nice step-by-step eligibilty tree here.
Home Affordable Modification Program
This is a bigger deal--the lender and the federal government together will split the cost of reducing the interest rate or the principal on a loan until payments represent no more than 31% of an owner's total income.
To qualify, owners must:
--be having difficulties meeting their mortgage payments (but don't have to be delinquent);
--must have a first mortgage under $729,750.
How it works:
If you qualify and can demonstrate hardship (through bills, tax returns, pay stubs with declining income, layoff notices, etc.), your lender will reduce your mortgage payment down to 38% of your total income. In turn, the federal government will further reduce it to 31% of total income. This lower payment will stay in place for 5 years, after which your interest rate will creep back up at 1% increase per year to today's rates (as if you refinanced today). The payment reductions are achieved through a combination of interest rate reductions, and, if necessary, amortizing the loan over a 40-year period rather than the usual 30 years.
Both the lender and the homeowner would get incentive payments if the modification takes place before the homeowner misses a payment, and if the loan, after modification, stays current. You may wonder about your second mortgage; you're eligible for either of these programs even if you have a second mortgage; lenders in the loan modification program get incentives for convincing the second mortgage holders to remove their lien (that is, forget the loan. Without this program, the argument goes, the second mortgage lender would lose everything anyway if there were a foreclosure).
Here is the Treasury summary of the program, and here is a step-by-step eligiblity tree. [This will now look familiar as I'm re-entering the links in 8/09; they've consolidated much of this material into one website.]
Borrowers with high debt loans may be required to undergo credit counseling.
This program is scheduled to lapse in December, 2012.
The government factsheets are emphatic that borrowers should NOT need to pay for consultant help for either of these programs. A list of Oakland area HUD-approved housing counseling agencies can be found here. The feds urge that you be patient in pursuing either of these remedies--they estimate 10 million households will be helped by the two, but I imagine many more households will be applying, asking questions, and tying up the line.
If you think neither of these programs is likely to be helpful for your circumstances, call me (and then call your accountant or tax professional) to discuss the idea of a short sale. In a short sale, we assemble a detailed package of material for your lender, put your home on the market for its current market value, sign a contract at close to that price, and then work to convince your lender(s) to absorb at least a big chunk of the amount outstanding on your loan(s). This is an instance where all my experience running federal mortgage programs in the Clinton Administration comes in very handy!
It's a complicated process, particularly if you have both a first and a second loan (and thus two lenders to negotiate with). However, we've heard of short sales involving hundreds of thousands of dollars in concessions on the part of lenders in the East Bay Hills.
I probably sound like your mother when I say it may make more sense to get going on the process rather than avoid it for a few more months, and live with the stress.
As always, let me know if I can help, or if you want to talk through some options!