Wanna Test Drive the New Housing Plan?

by Tony Chavira

We’ve all read the blurb regarding the Homeowner Affordability and Stability Plan: Fannie Mae and Freddie Mac are going to have to refinance your ugly ugly mortgage, even if the principle amount of your loan's more than 80% of the actual value of your home. At this point, too many people have lost their homes to act like we have many other options.

This was only the first step, and just one piece of “The Making Home Affordable” program. Part deux, announced yesterday, requires lenders to voluntarily agree to modify a loan. The lender first has to bring your payment amounts to about 38% of your income by reducing the interest rate, and that includes your principal, interest and taxes. Afterward, the government will share the cost with the lender to further reduce your payments to 31% of your income. In some cases, they might even reduce your principal. If you’re unlucky enough to be in that position.

“But why would lenders volunteer to do jack for me?” you ask. Well, the government’s got your back with a ton of incentives. In fact, if your home’s foreclosed on later, government cash called “Home Price Decline Reserve Payments” will basically cover part of your home’s drop in value. I mean, if the government doesn’t make your home worth something, why would lenders bother to refinance your loans?

Unfortunately the legislation’s jam-packed full of details which are meant to allow leniency for each loan on a case-by-case basis, and isn’t all wine and roses in that respect. Here’s what I mean: If a bank gives out a lot of single-family mortgages, they work on pretty thin margins… which get thinner and thinner as more people default. How are they going to have the time or resources to attack each mortgage on a case-by-case basis? Wouldn’t it just be easier in terms of time, effort and headaches just to foreclose a mortgage?

Also, what if you’ve been laid off? I mean, we ARE in a recession… how are you going to cut a check for 31% of $0.00? Just as bad, what if your home costs less than what you owe on it (which is the case for a whole lot of Southern California residents)? Why would you want to risk a scary loan refinance when you can just had over the keys to your place and start back around zero? Your equity’s gone anyway.

Senior Resident Fellow John McIlwain at the ULI GroundFloor Blog puts it best:

The Administration get an A for effort and thoughtfulness. There may in fact be no better plan possible short of a moratorium on all foreclosures. Many borrowers will likely get modifications they would otherwise not get, which is all to the good. But this plan is unlikely to end the growing number of foreclosures, only slow it somewhat.

Here’s hoping, but at least you’ve got a good heads-up for what’s coming.

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