Facing Foreclosure? How The Obama Plan Can Help

It was in February that the Obama Administration first announced it would create a mortgage relief program for millions of distressed borrowers. The details of the plan are now out, so it’s possible to see who can be helped — and who can’t.

To start, we’re talking about help from Fannie Mae and Freddie Mac. Between the two of them they own or guarantee some 30 million mortgages. In addition, a number of private-sector lenders will also adopt the Obama plan. While we are talking about a huge number of loans it’s important to say that not all loans will be covered — INCLUDING millions of mortgages held by Fannie Mae, Freddie Mac, etc.

The Obama plan has two elements: modifications for those facing foreclosure and refinancing for those with loans which are unaffordable. We’ll look at foreclosure help with this posting and at refinancing in a separate posting.

Modifications

Millions of homes are being lost to foreclosure. The numbers are gruesome. RealtyTrac.com reports that 2,330,483 homes received foreclosure notices in 2008. That’s a huge number, up 81 percent over 2007 and 225 over 2006.

The recent foreclosure numbers understate the real problem. Why? Because for the past few months Fannie Mae, Freddie Mac, some private lenders and many states have had foreclosure moratoriums — they are simply not foreclosing. If those moratoriums (moratoria?) were not in place, the foreclosure stats would be far higher.

For those facing foreclosure the deal works like this: Your lender must agree to lower your monthly housing costs to not more than 38 percent of your gross monthly income. This can be done by lowering the interest rate, extending the loan term or reducing the debt. Since no lender will reduce the principal amount if possible, the real changes will be in the form of lower rates, a long loan term or both.

31 Percent

Once the lender gets housing costs — principal, interest, property taxes and property insurance in most cases — down to 38 percent, borrowers will then be obligated to pay 31 percent of their gross monthly income (the income before taxes) for housing costs.

And what about the 7 percent difference between 38 percent and 31 percent? The government will pay that money directly to the lender. In the end, the borrower is paying 31 percent of his or her gross income and the lender is receiving the equivalent of 38 percent.

Keys

Some important points:

• The modifications can last five years or longer — most will last only five years.
• There is a three-month trial period. Fail to make full and timely payments during the trial period and you’re out.
• The new interest rate can be as little as 2 percent. This won’t happen.
• There are no modification fees or charges for the borrower
• Each year you make your payments in full and on time your mortgage principal will be reduced by $1,000. This benefit lasts for as long as five years. The beauty of this credit is that when you sell you owe less to the lender. This is pure profit to the borrower.
• “Every potentially eligible borrower,” says the government, “who calls or writes in to their servicer in reference to a modification must be screened for hardship. This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the payment that is likely to create a financial hardship (payment shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation.” Important: Borrowers with hardships qualify under the program — you do not actually have to be facing foreclosure.
• The home must be an owner occupied, single family 1-4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under state law).
• The home must be a primary residence (verified with tax return, credit report, and other documentation such as a utility bill). No investor properties, vacant homes or condemned homes qualify.
• Borrowers in bankruptcy are NOT automatically eliminated from consideration for a modification.
• Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving their legal rights.
• If there are two loans on the property both lenders will have to agree to a modification. In many cases this will not happen. 
• Under the taking clause of the Fifth Amendment the government cannot force mortgage investors to modify their loans without “just compensation.” That means lender participation in this program is voluntary and some lenders will not volunteer. This is important because millions of loans have been sold to create mortgage-backed securities. It is the owners of those loans who actually own individual mortgages. In many cases Fannie Mae and Freddie Mac guarantee such securities but they no longer own the mortgages.

What does it all mean?

Unlike the FHASecure program and the original Hope for Homeowners effort, both of which were total flops under the Bush Administration, the Obama plan uses government money to save homes from foreclosure. Not all homes and not all borrowers will benefit, but large numbers of people who were getting zero federal help prior to 2009 will have their homes saved under this program.

For details and specifics, contact your lender. Your monthly mortgage bill or payment book will have lender contact information. In addition, local real estate attorneys, community housing organizations and state attorneys general can also provide assistance.

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