Obama housing fix open for business
Officials release details of $75 billion loan modification and refinancing programs. Borrowers can start contacting loan servicers, though companies will need time.
By Tami Luhby, CNNMoney.com senior writer
Last Updated: March 5, 2009: 12:39 PM ET
NEW YORK (CNNMoney.com) -- The Obama administration's foreclosure prevention program was launched Wednesday.
The multipronged fixcalls for companies to help as many 4 million struggling borrowers by modifying loans so housing payments are no more than 31% of monthly gross income. Separately, homeowners who haven't missed a payment can refinance into lower-cost loans even if they have little or no equity. This is expected to help up to 5 million homeowners.
While borrowers are being encouraged to contact their loan servicers, companies said it would be several weeks before they can start processing applications.
The $75 billion loan modification plan will provide incentives to borrowers, servicers and mortgage investors. The government will also subsidize interest rate reductions to get borrowers to affordable monthly payments.
"This plan will help make home ownership more affordable for nine million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans," said Housing Secretary Shaun Donovan.
Administration officials once again stressed that they are not using taxpayer money to bail out irresponsible homebuyers, listing those who will not qualify for assistance: people who bought investment properties, lied on their mortgage documents or purchased multimillion dollar homes.
"The cost of not acting outstrips that of acting boldly," said a senior administration official.
Borrowers can now contact their servicers to see whether they are eligible for assistance. Federal officials have posted additional information for borrowers to determine their eligibility at www.hud.gov. They will also promote the program at homeownership events nationwide.
However, servicers, who just received the guidelines on Wednesday, said it will take them some time to upgrade their systems and train their staffs to handle borrower calls. Fannie Mae, for instance, said the lenders and mortgage brokers it works with will be able to process refinancing applications starting in April.
Many firms, however, have said they will put foreclosures on hold until they can implement the guidelines.
Who's eligible?
The administration Wednesday released additional eligibility criteria and guidelines for the refinancing and modification prongs of the program.
The refinancing portion, which is open to homeowners who took out loans from Fannie Mae and Freddie Mac, allows borrowers with less than 20% equity in their homes to refinance to the current prevailing rate. However, borrowers cannot owe more than 105% of the value of their home and must be current on their payments.
CALIFORNIA FORECLOSURES: "Lenders must accept Loan Modifications!"
A new law enacted on July 8, 2008, now requires Lenders of residential loans in the State of California to accept loan modifications in most foreclosure situations. California Civil Code 2923.6 went into effect on July, 2008, and applies to all residential loans made from January 1, 2003, to December 31, 2007, inclusive, that are secured by residential real property and are for owner-occupied residences.
Practically all residential mortgages have Pooling and Servicing Agreements (“PSA”) since they were transferred to various Mortgage Backed Security Trusts after origination. These vehicles likewise almost always contain a duty to maximize net present value to its investors and related parties. Under the new laws, California Civil Code 2823.6 broadens and extends this PSA duty by requiring servicers to accept loan modifications with borrowers.
Essentially, California Civil Code 2823.6(a) states that “a servicer acts in the best interest of all parties if it agrees to or implements a loan modification where the (1) loan is in payment default, and (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis.”
Likewise, California Civil Code 2823.6(b) now provides “that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority.”
So what does all this mean? Well, lets take an example:
Michael Smith's loan is presently in default, or reasonably foreseeable of near default. The house he previously bought 2 years ago for $700,000 with a $540,000 first and $140,000 second, has now plummeted to $375,000. While Mr. Martin can no longer afford the $6,000 per month mortgage payment, he is willing, able, and ready to execute a modification of his loan on the following terms:
a) New Loan Amount:$330,000.00
b) New Interest Rate:5.25% fixed
c) New Loan Length:30 years
d) New Payment:$1822.27
While this new loan amount of $330,000 is less than the current fair market value, the costs of foreclosure need to be taken into account. Foreclosures typically cost the lender $50,000 per foreclosure. For example, the Joint Economic Committee of Congress estimated in June, 2007, that the average foreclosure results in $77.935.00 in costs to the homeowner, lender, local government, and neighbors.Of the $77,935.00 in foreclosure costs, the Joint Economic Committee of Congress estimates that the lender will suffer $50,000.00 in costs in conducting a non-judicial foreclosure on the property, maintaining, rehabilitating, insuring, and reselling the property to a third party. Freddie Mac places this loss higher at $58,759.00.
Accordingly, the anticipated recovery through foreclosure on a net present value basis is $325,000.00 or less and the recovery under the proposed loan modification at $330,000.00 exceeds the net present recovery through foreclosure of $325,000.00 by over $5,000.00. Thus California Civil Code 2823.6 would mandate a loan modification to the new terms.
The homeowner just got a new arrow to add to his foreclosure defense quiver. Pursuant to California Civil Code 2823.6, the lender is now contractually bound to accept the loan modification as provided above. Failure to do so should allow the borrower to sue for specific performance or wrongful foreclosure in State Court.
The Obama Administration announced last April 28, 2009 new details to being relief to homeowners under the Making Home Affordable program. Two new programs were unveiled. The first one is called the Second Lien Program which is designed to help homeowners achieve affordability. The Second program involves the integration of the FHA Hope for Homeowners plan into the Making Home Affordable Plan.
There are significant challenges to modifying loans for homeowners with first and second mortgages, especially in cases where the first and second mortgages involve different lenders. It is estimated by the U.S. Treasury that up to 50 percent of homeowners at-risk of being foreclosed involve homeowners with Second Mortgages on their homes. Hence, the Second Lien Program announced last week is estimated to help millions of homeowners.
The Second Lien Program is envisioned to work together with the loan modification offered under the MHA program. When a Home Affordable Modification is initiated on a first mortgage, lenders participating in the Second Lien Program will automatically reduce payments on the Second mortgage according to some standards set by the U.S. Treasury. This program also makes it possible for homeowners to buy out the second mortgage with a lump sum payment under a formula also set by the U.S. Treasury. This gives homeowners the chance to extinguish second mortgages when appropriate.
The other announcement by the U.S. Treasury involves steps to incorporate the FHA’s Hope for Homeowners into the MHA program. Hope for Homeowners require the lender to accept a payoff below the current market value of the home, allowing the homeowner to refinance into a new FHA guaranteed loan. Refinancing into a new loan below the home’s market value gives the homeowner equity in the home thus resulting in a better financial position for borrowers who qualify.
Under the program changes announced last week, when lenders evaluate a homeowner for an affordable home modification, lenders will be required to determine the homeowner’s eligibility for a Hope for Homeowners refinancing. Where the homeowner qualifies, the lender must offer this option to the homeowner. To encourage lenders to join the program, they will be given incentives similar to the success payments in the MHA program.
To better illustrate the second lien program, the U.S. Treasury came up with two case examples.
The first example involved Family A, which took out a 30-year closed-end second mortgage with a balance of $45,000 and an interest rate of 8.6%. Today, the Family A has an unpaid balance of almost $44,000 on their second mortgage. Under the second lien program, the interest rate on Family A’s second mortgage will be reduced to 1% for the 5 years reducing their annual payments by over $2,300. After those 5 years, Family A’s mortgage payment will rise again but to a more moderate level.
The second example involves Family B, which took out an interest only second mortgage with a balance of $60,000 with an interest rate of 4.4% and a term of 15 years. Today, Family B has $60,000 remaining on their interest only second mortgage because none of the principal was paid down. Under the second lien program, the interest rate on Family B’s interest only second mortgage will be reduced to 2% for 5 years reducing their annual payments by $1,440. after those 5 years, Family B’s mortgage payment will adjust up and the mortgage will amortize again over a certain term.
Treasury Secretary Tim Geithner said that: “With these latest program details, we’re offering even more opportunities for borrowers to make their homes more affordable under the administrations housing plan.” These programs are part of the ongoing effort of the Obama administration to solve the current economic crisis. Programs, guidelines and participants in these programs are likewise being constantly revised. Thus, homeowners also need to be vigilant and get up to date information on all their options as available programs are also constantly changing and updating
The Home Buyer Tax Credit
Significant tax incentives exist for both first-time buyers and those who already own.
An extension of the first-time home buyer tax credit signed into law on November 6, 2009 provides an incredible incentive for existing owners.For both groups, the tax credit is available to those who sign a purchase agreement before April 30, 2010.
For existing owners
Existing homeowners are eligible for a tax credit of up to $6,500 ($3,200 for those who are filing separately). Here are some more details:
• You must have owned your home and used it as a principal residence for at least five consecutive years of the previous eight years. (E.g. If you sold a home you owned and lived in for five years two years ago, and have been renting since, you’d still be eligible for the credit.)
• As long as there is a written, binding contract to purchase that is signed before April 30, 2010, you will be eligible for the credit. You will have until July 1, 2010 to close.
• The income limits to qualify for the full credit are $125,000 for a single person and $225,000 for a married couple. Individuals earning up to $145,000 and married couples earning up to $245,000 are eligible for partial credit.
• The credit cannot be used on homes costing more than $800,000. This is an absolute ceiling.
• Your new house does not need to cost more than your old house for you to be approved for the credit.
Claiming your credit is easy, but you will need to include documentation of the purchase with your tax return and the form for claiming the credit.
To learn more, click here.
For first-time buyers
The first-time buyer credit of up to $8,000 has been extended to April 30, 2010. To qualify, you must have a written, binding contract in place before April 30, 2010, and close the transaction before July 1, 2010.
Another aspect of the bill that extends the credit is an increased income limit. The income limits to qualify for the full credit are $125,000 for a single person and $225,000 for a married couple. Individuals earning up to $145,000 and married couples earning up to $245,000 are eligible for partial credit.
Here are some additional details about the tax credit first-time buyers should consider:
• “First-time home buyers” are defined as buyers who have not owned a principal residence during the three-year period prior to the purchase. For married couples, both spouses need to fit this requirement to qualify for the tax credit.
• These home buyers can receive a tax credit on their income tax return in the amount of 10% of the cost of a single-family home used as a principal residence, set to a maximum amount of $8,000. The credit is available for any type of home.
• The credit does not have to be repaid.
Instructions
Claiming the tax credit is easy; you can claim it on your federal income tax return. Complete IRS Form 5405 to determine your tax credit amount, and then claim this amount on Line 69 of form 1040. No other applications are needed. To download the IRS Form 5405 for claiming the tax credit, click here.
To learn more, click here.
