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Obama's Foreclosure Plan Wins Early Support

Mortgage rescue plan aims to help responsible, troubled homeowners

By Mark Huffman
ConsumerAffairs.com

February 19, 2009

Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Nearly One In Four Homeowners Under Water • Existing Home Sales Jump 10 Percent • Mortgage Delinquencies Still Climbing • Realtors See Signs Of Housing Turnaround • Zillow.com: Fewer 'Underwater' Homeowners In Third Quarter • Distressed Homeowners May Be Able To Rent Their Homes • Should You Walk Away From Your Underwater Mortgage? • Home Prices Rise Four Months In A Row • Consumer Credit Plunges In August • Study: Action By Feds Made Housing Crisis Worse • Mortgage Lender's Collapse Leaves Borrowers Adrift • Bank of America, Wells Fargo Hit With Class Action • Bank Sees Dim Future For Homeowners • Ohio Sues Mortgage Servicer Over Lack Of Modifications --- • More ...

By recent spending standards, its a fairly modest price tag; $75 billion to help distressed homeowners avoid foreclosure. But so far, the Obama plan to modify mortgages is winning applause from consumer advocates who say it could make a difference.

"Obama''s plan offers a coordinated set of initiatives that, taken together, mark a fresh and welcome new chapter in the government's response to this ongoing crisis," said Barry Zigas, Director of Housing Policy for the Consumer Federation of America. "

"We are especially pleased that a major component of this announcement is the President's support for legislation that would permit bankruptcy judges to modify the terms of mortgages on primary residences through bankruptcy proceedings.," he said.

Zigas noted that this change is a long-standing priority for CFA and other consumer organizations. "These changes to the bankruptcy law will help consumers who are forced into bankruptcy reach a more equitable resolution of their debts, and should encourage lenders to match President Obama's package of other initiatives to help homeowners avoid such a fate."

Zigas also supported other details of the plan, including increased support for housing counselors.

"The real test of this plan will be servicers' and investors' willingness to move quickly to adopt its features and take advantage of its benefits," he said. "The administration's promise to provide full transparency and monitoring of this plan is very important, and we will be watching progress closely. We strongly encourage all lenders and servicers to get behind this new initiative as quickly and as enthusiastically as possible."

Elements

Obama's Homeowner Affordability and Stability Plan has four key elements:

• Refinancing help for four to five million homeowners who receive their mortgages through Fannie Mae or Freddie Mac;

• New incentives for lenders to modify the terms of sub-prime loans at risk of default and foreclosure;

• Steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages; and

• Additional reforms designed to help families stay in their homes.

"The plan I'm announcing focuses on rescuing families who have played by the rules and acted responsibly," the President said, "by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments."

If you have been unable to refinance your mortgage because you still owe more than 80 percent of your home's value, the new program will provide the opportunity to refinance, if your current mortgage is owned or guaranteed by Freddie Mac or Fannie Mae. The government believes up to five million homeowners could fall into that category.

The Treasury Department, working with the FHA, the FDIC and other federal agencies, said it will undertake a comprehensive multi-part strategy to prevent millions of foreclosures and help families stay in their homes.

The government is expected to provide clear and consistent guidelines to lenders for modifying loans; it will require strong government oversight of the modification process; and it will require plan recipients follow guidance for loan modification.

Perhaps most significantly, it will allow courts to step in and modify terms of a mortgage if the borrower has declared bankruptcy. However, the government said that option will be reserved for cases "when a borrower has no other options."

Underwater rescue

The plan is also intended to help responsible homeowners who are "underwater" — struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Rather than be faced with foreclosure, they will be allowed to temporarily make "reasonable" monthly payments until the market stabilizes.

You might be eligible for the program if you meet any of the following criteria:

• Focusing on Homeowners At Risk: Anyone with high combined mortgage debt compared to income or who is "underwater" (with a combined mortgage balance higher than the current market value of his house) may be eligible for a loan modification. This initiative will also include borrowers who show other indications of being at risk of default. Eligibility for the program will sunset at the end of three years.

• Reaching Homeowners Who Have Not Missed Payments: Delinquency will not be a requirement for eligibility. Rather, because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

• Common Sense Restrictions: Only owner-occupied homes qualify; no home mortgages larger than the Freddie/Fannie conforming limits will be eligible. This initiative will go solely to supporting responsible homeowners willing to make payments to stay in their home — it will not aid speculators or house flippers.

• Special Provisions for Families with High Total Debt Levels: Borrowers with high total debt qualify, but only if they agree to enter HUD-certified consumer debt counseling. Specifically, homeowners with total "back end" debt (which includes not only housing debt, but other debt including car loans and credit card debt) equal to 55% or more of their income will be required to agree to enter a counseling program as a condition for a modification.

Homeowners will apply for the program through their current lender. Mortgage lenders will begin accepting applications after the details of the program are announced on March 4, 2009.

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