Can You Refinance Your Loan Under The Obama Mortgage Relief Plan?
The 2009 Obama foreclosure relief plan has two parts, first there is modification help for those who face foreclosure and, second, there is also a refinancing program for those with loans which are no longer affordable.
Under the details of the plan we can see how the refinancing program works, who qualifies and who does not.
In basic terms, loans become unaffordable when borrowers are no longer able to make payments or when payments consume so much monthly income that owners are effectively pauperized. In many cases, but not all, there is an instant solution to the affordability problem, namely refinancing at a lower rate.
Rates
With rates today near 5 percent — about as low as they’ve been in 50 years — refinancing makes great sense. However, many homeowners cannot refinance because the value of their home is worth less than the remaining principal balance of their mortgage. You can describe such owners as underwater, upside down or simply in steep trouble.
The obvious reason for upside down owners is that properties were bought with little or nothing down and then home values fell. However, there is a second reason why many owners are underwater: They have “negatively amortizing” loans, toxic mortgages where the owners make low monthly payments during start periods. Such payments are very affordable — and they are also a trap. Why? Because the payments are so small they do not even cover interest costs. The result is that unpaid monthly interests costs are added to the loan balance. That’s right, the size of the loan grows each month.
You can imagine what happens when start periods end: The loan balance is larger so monthly payments soar. Sometimes they double. Now the owner must sell but can’t because local home values have fallen. They also can’t stay because the monthly payments are not affordable. The usual results of this dilemma are foreclosure, bankruptcy and simply walking away from the house.
Upside Down Buyers
The Obama plan tries to deal with upside buyers. It says that if you have negative equity you can refinance with help from the government. It also says your negative equity can be no more than five percent.
“Eligible loans,” says the White House, “will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.”
The States
This is a huge limitation because it automatically disqualifies vast numbers of borrowers in California, Arizona, Nevada, Florida, Michigan, Ohio, Indiana, Illinois, Pennsylvania and other jurisdictions which have seen massive price declines.
To apply for a Home Affordable Modification, says the government, you must:
___ Be an owner-occupant in a one to four unit property. No investors.
____ You must have an unpaid principal balance that is equal to or less than $729,750 (for one unit properties and higher for two to four unit properties (consult your servicer),
___ You must have a loan that was originated before January 1, 2009,
___ Your mortgage payment (including taxes, insurance, and home owners association dues) cannot be more than 31% of your gross (pre-tax) monthly income.
___ You must have a mortgage payment that is no longer affordable, perhaps because of a significant change in income or expenses.
Hardship
Notice the last item. The refinancing is intended only for those with financial hardships.
The government says that “responsible borrowers who are struggling to remain current on their mortgage payments are eligible if they are at risk of imminent default, for example, because they have had or will soon have a significant increase in their mortgage payment that they cannot afford. If you have had or anticipate a significant increase in your mortgage payment or have had a significant reduction in income, contact your servicer. If you meet the minimum eligibility criteria for a Home Affordable Modification, your servicer is required to evaluate your loan to see if you are at risk of imminent default.”
How It Works
Okay, let’s say you’ve lost your job, your spouse has died or medical bills are piling up. If you can refinance under the program how will you benefit?
The government explains the program this way:
Your loan servicer — the kindly folks who collect your monthly payments — must determine that your loan meets the minimum eligibility criteria (owner occupied, originated before January 1, 2009, is equal to or less than $729,750). If yes:
___ Obtain sufficient income information to determine if your monthly mortgage payment is more than 31% (approximately 1/3) of your gross or pre-tax monthly income. (Your servicer may initially accept verbal information about your income, but eventually you will need to provide proof of income in the form of tax returns and pay stubs). If yes:
___ Add past due charges (interest, taxes, insurance and costs that your lender paid to other parties on your behalf — but not late fees, those must be waived) to the loan balance.
___ Determine how much of an interest rate reduction will be required to get your mortgage payment down to a point where it is about 31% of your gross monthly income.
___ Apply a test to determine if the cost of the modification (including the government’s incentive payments) is less costly for the investor than a foreclosure. If yes:
___ Put you on a trial modification for three months at the new interest rate and payment.
___ If you successfully make the payments and are current at the end of the trial period, your servicer will execute a permanent modification agreement that will lower your interest rate to a fixed rate for five years. (Notice that the government defines permanent as five years….)
___ The modification payment will also include a monthly amount to be set aside (escrowed) to pay taxes and insurance when they become due. This escrow is required even if your prior loan was not escrowed.
For details and specifics, contact your loan servicer. Your monthly mortgage bill or payment book will have contact information. In addition, local real estate attorneys, community housing organizations and state attorneys general can also provide assistance.
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