Understanding the Obama Housing Programs
Another day, another catchy new phrase, another smartly designed website from the Obama administration. But the government's new housing-recovery site just might be worth a look if you need mortgage help.
Makinghomeaffordable.gov is the latest effort from the crack White House IT team, as they try to find a way to reach 9 million homeowners and let them know there may be help on the way.
Of course, the operative word is "may" because no one really knows if up to 9 million loans can be modified or refinanced. Can this new site cut through the clutter and really help struggling homeowners?
Perhaps. I spent some time on the site this morning and there is more clarity there than I've seen so far in other descriptions of President Obama's $75 billion Home Affordability and Stability Plan.
To start with, the site clearly explains that the plan offers two choices: You can try to refinance your mortgage through the government or you can try to modify your mortgage through the government.
Refinance: If you've paid your mortgage on time but your home equity has evaporated with the collapse of housing prices, you may be able to get government help refinancing if the amount of your first mortgage does not exceed 105 percent of the market value of your property. But the program is open only to homeowners whose loans are held or securitized by Fannie Mae and Freddie Mac (supposedly up to 80 percent of conventional loans under $417,000). The site directs you to Fannie and Freddie sites to find out whether they hold or own your loan.
I went to those sites and looked up my own loan. Fannie Mae only asks you to put in the street address and click a box to verify that you own the property. Freddie Mac asks for more detailed information, including your Social Security number. My loan didn't pop up as owned by either of the FMs. So while the pages are well-designed and easy to use (Fannie's is easier than Freddie's), all I learned is that I'm probably not eligible -- unless the site has made some sort of mistake. (I suppose with millions of loans to manage, this is always a possibility.)
Modify: Under the Home Affordable Modification Program, you must be having trouble paying your mortgage and your loan costs must now exceed 31 percent of your gross income. Say you're spending $3,500 per month on your first mortgage, property taxes and homeowners insurance and you earn $120,000 per year. According to the nifty Payment Reduction Estimator, 31 percent of your gross monthly income would be $1,550. So if you could bring your mortgage costs down to 31 percent, you'd save $1,950 per month.
That sounds like a big savings, but it's hard to figure out how the average homeowner is going to get there. You can't reduce the property taxes or insurance payment. You can only forbear some of the principal or reduce the loan balance or the interest rate. The mortgage rate can go as low as 2 percent, although it would rise after five years to a cap set at the current 30-year rate on the day the loan was modified. If you've lost your job, even 31 percent might not be low enough for you to make payments.
The big question in all this is what happens to the second lenders. Many of the troubled loans have seconds (home equity loans or lines of credit). In both the refinance and modification scenarios, the second lenders must agree to let the primary loans change, something they've been relatively unwilling to do as they've been taking a bath in all of the foreclosures. If they don't agree, then neither a refinance nor a loan modification can take place. Substantial incentives are in place for primary lenders, but it's unclear whether home equity lenders will play ball, unless they figure that more folks will make their home equity payments with all of the savings on their newly modified or refinanced primary loan.
Which gets me back to the point. Will 9 million people really be able to take advantage of this program and lock in a 4.75 percent interest rate for the life of the loan? It could be a huge boost for the economy (think of all the extra cash these folks will have to spend each month). But even for the perennially optimistic real estate industry, this seems a bit unlikely.
