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New Mortgage Plan: Who Qualifies and How It Works PDF Print E-mail
Written by By: Mark Koba, CNBC   

For homeowners looking to make sense of the Obama administration's new mortgage rescue plan, the program can be basically broken down into two sections.

One part is for homeowners facing foreclosure due to missed payments and are at risk of defaulting on their loans. For them, the government will give the lender financial incentives to "modify" the existing mortgage, reducing the monthly payments so that the homeowner can stay current on the loan and keep their home.

The other part is for homeowners who are keeping up with their mortgage payments but can't refinance with their lender because the value of their home has fallen below the amount of the mortgage.

For these "under water" homeowners, the rescue plan will help refinance the mortgage to lower the monthly payments. There are several restrictions, however, so relatively few homeowners in this category will actually qualify.

That's the simple explanation. But both plans have a lot of moving parts, so here's what you need to know if you want to take advantage of them.

Mortgage Modification

If you're facing foreclosure and want to "modify" your mortgage to keep your home, you must meet the following criteria:

  • Have secured your mortgage before Jan. 1, 2009
  • Have a primary mortgage of less than $729,500
  • You must live on the property
  • Must fully document income with tax returns and pay stubs
  • Sign a financial hardship statement
  • Go for counseling if your total household debt totals more than 55 percent of income.
  • "Homeowners must be late on their payments to qualify," says Trish Summers, a private mortgage banker with Luxury Mortgage company in Stamford, Connecticut.

     

    If you meet all those qualifications, your lender will then determine how much to lower your monthly payment so it's about 31% of your gross monthly income. The interest rate could be as low as 2%.

    Homeowners pay no fees for the modification. However, homeowners could face a balloon payment at the end if your lender reduced your monthly principal payment during the modification. So if your lender reduced your total payments $20,000, you could owe that amount when paid off your loan, refinanced or sold your house.

    But there is some financial benfit for the homeowner in the plan. For every month a homeowner makes a payment on time, the Treasury will pay an incentive that reduces the principal balance on a loan. Over five years the total principal reduction could add up to $5,000.

    There's also a trial period period for the modification.

    "The loan servicer gets paid by Fannie (Mae) or Freddie (Mac) after three months," says Summers. "If the homeowner pays the mortgage on time, the servicer gets $1,000 from the government each year for the next three years. If the mortgage is not paid on time in those three months, the deal is over."

    And the new loan rate can go up after 5 years. It's only a low in the beginning to help the homeowner dig themselves out.

    The plan is in effect until the end of 2012 and can only be used once.

    Refinancing Option

    If your current on your mortgage but your bank won't let you refinance because your mortgage is "under water," here's how you qualify for the government refinancing program:

  • Your home must be the primary residence
  • Your loan must be owned by Fannie Mae or Freddie Mac
  • You must have sufficient income to support the new mortgage debt
  • You can't take cash out of the new loan to pay other debt
  • There's another big restriction, however, that will make many homeowners ineligible for the program: the value of your house can't have fallen much below the amount of the mortgage.

    "The ceiling of eligibility is 105 percent of current market value of the property—so that’s not going to help homeowners who have suffered home price declines," says Greg McBride, senior financial analyst at Bankrate.com. "Say you bought a house for $320,000. Your mortgage balance is now $300,000  But the house is now worth only $225,000. You are stuck, you can't refinance, even if you made your payments on time."

     

    McBride says the loan to value ceiling should be raised. "It should be something in the neighborhood of 150 percent," says McBride. It's too low to help people in Florida, California, Nevada and Arizona. Those markets are at the epicenter of the foreclosure crisis."

    Still, if you do qualify, here's what you get:

  • Your mortgage will be refinanced to 30 or 15 years with a fixed interest rate.
  • The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender
  • Interest payments but be reduced but not principal
  • Plenty of Critics

    The Obama plan says it will help as many as 4 million struggling borrowers modify their loans and some 5 million refinance their current loans. But industry experts remain skeptical.

    "One in five homes have come down in value across the country," says Summers. I'm not sure this plan is going to help in refinancing. I think they really need to reduce the balance on the loans to make this work."

    And as for the modifications, McBride says there will be those getting help when they made bad decisions.

    "I don’t have much hope for it," says McBride. "In reviewing the guidelines, I see nothing to prevent a homeowner that cashed out equity when prices were on the way up, from getting a modification. Are they going to give back the big screen TV and BMW? Probably not."

     
    Mortgage help: Do you qualify? PDF Print E-mail
    Written by By Les Christie, CNNMoney.com staff writer   

    The eagerly anticipated foreclosure prevention program unveiled Wednesday by President Obama targets 9 million borrowers for help - are you one of them?

    The $75 billion effort, dubbed the Homeowner Affordability and Stability Plan, boils down to two basic solutions:

    First, the government is aiming to help more homeowners refinance to take advantage of new low interest rates.

    Second, it provides incentives to lenders and servicers to restructure your mortgage to more affordable levels.

    Official guidelines won't be unveiled until March 4, but here's how to know whether you'll likely be able to take advantage of either of these options.

    Help for those seeking refinancing

    This part of the program targets borrowers who have kept current on their mortgages. Many of the homeowners in this group have been unable to lower their housing costs through refinancings because of falling home prices.

    Right now, if you're underwater on your mortgage, owing more than the home's market value, forget about qualifying for a refi. In fact, at least 20% equity in your home is now a must, unless you're using an FHA loan.

    The new guidelines should help. Even homeowners with debt that exceeds home value by 5% could be eligible. And there will be no prepayment penalties. But your loan must be owned or backed by Fannie Mae or Freddie Mac.

    The Administration estimates that this will enable up to 5 million homeowners to obtain lower interest rate mortgages.

    Who's not eligible. Homeowners whose property values have dipped severely, putting them underwater by more than 5% are out of luck.

    Those with "jumbo" mortgages also don't qualify - only those with "conforming' mortgages do. To be absolutely sure what kind of loan you have, you need to check with your servicer or lender after March 4. But in general, until the past year, loans above $417,000 were considered jumbo mortgages, and Fannie Mae and Freddie Mac were not allowed to buy and guarantee them.

    All borrowers will have to prove they have sufficient income to be able to keep up their loan payments, though what would be sufficient proof wasn't yet clear.

    Mortgage modification help for at-risk borrowers

    Homeowners in default or at risk of default may qualify for loan modifications, which restructure the terms of loans.

    Anyone with high combined mortgage debt compared to income or who is underwater may be eligible for a loan modification.

    Borrowers with high levels of other debt, such as car loans and credit card debt exceeding 55% of their incomes, may still qualify for a modification but they'll be required to accept debt counseling in a HUD-certified program.

    If you qualify, your servicer or lender will reduce your monthly mortgage payments to 31% of your gross income.

    The payment would stay there for five years and then gradually revert back to the conforming loan rates in place at the time.

    The reduction would come mostly through interest-rate reductions, though in some cases, principal reduction also would be an option.

    Borrowers would also receive incentive bonuses of up to $1,000 a year for five years for making payments on time.

    President Obama estimated 3 to 4 million homeowners could benefit from the new modification procedures.

    Who's not eligible. Speculators, those who bought homes for investment purposes, do not qualify for help -- all homes must be owner/occupied.

    The program will also not reward homebuyers who were irresponsible in their borrowing. All applicants will be closely examined by lenders and those who acted unscrupulously by, for example, misrepresenting their incomes in no-doc loan applications, would not qualify.

    And, in order to protect taxpayers from excessive expenses, no loans will be modified unless it results in a net savings compared with the costs of foreclosing. Finally, rates would not be lowered below 2%.

    That will disqualify many borrowers who simply can't afford any reasonable mortgage payment because of illness, for example, or job loss.

    "[The plan] will not reward folks who bought homes they knew from the beginning they would never be able to afford," said Obama. "In short, this plan will not save every home."

    No mortgages for amounts above comforming loan limits would be eligible.

     
    Obama to test home loan do-overs PDF Print E-mail
    Written by By Les Christie, CNNMoney.com staff writer   

    Mortgage modifications have a bad rap, yet President Obama is depending on them to stop the foreclosure crisis.

    Modifications continue to be pushed as the best way to get struggling borrowers back on their feet. The jury is out on whether modifications work long-term. One recent study showed about half of borrowers with modified loans fell behind within six months.

    Still, Obama is giving modifications a central role in his $75 billion foreclosure prevention program.

    The program, which starts on Wednesday, calls for loan servicers to lower struggling borrowers' interest rates so that total payments are no more than 31% of their gross income. The government will subsidize part of the reduction, as well as kick in incentives for the servicers, borrowers and mortgage investors to participate in the modifications. (See "Do you qualify?")

    The program is getting mixed reviews.

    Industry experts applaud the president's emphasis on making payments affordable, a criteria made popular last year by Federal Deposit Insurance Corp. chief Sheila Bair. But, they say, the plan will fall short without a stronger push to reduce loan balances for those who owe more than their homes are worth and without a better plan for those deep in all kinds of debt.

    Modification problems

    Servicers are increasingly turning to modifications as the foreclosure crisis escalates. They have modified about 1.3 million loans between July 2007 and January 2009, according to statistics released Tuesday by Hope Now, an alliance of the mortgage industry and housing counselors. The efforts - which usually involve adjusting interest rates, loan length or principal balance - have been largely voluntary and uncoordinated.

    In recent months, modifications have come under attack as a mere short-term fix. In December, the Office of the Comptroller of the Currency added fuel to that fire by reporting that more than half of borrowers with loans adjusted in the first half of 2008 were behind in their payments six months later. The Hope Now survey shows that between 30% and 40% of modifications had re-defaulted within six months.

    But many modification supporters said reports of redefaults don't take into account how loans were modified. Until recently, the adjustments often entailed increasing the monthly payments to make up for the arrears.

    Some 34% of mortgages modified in November resulted in a higher payment, while another 17% had no change in payment, said Alan White, a law professor at Valparaiso University. More than nine of 10 voluntary modifications in 2008 involved no cancellation of principal, past-due interest, late fees or expenses.

    "The redefault problem has resulted in criticism of the very idea of modifying mortgage loans," White wrote in a January report. "On the other hand, there is considerable evidence that more aggressive modifications, especially those that reduce the principal debt, are much less subject to high rates of redefault."

    In recent months, however, more servicers have focused on adjusting borrowers' payments to an affordable level, usually between 31% and 38% of a borrower's gross monthly income. Housing advocates, as well as industry officials, hope this will increase modifications' success rate.

    "Affordability makes sense," said Faith Schwartz, Hope Now's executive director. "It's certain a key factor in why modifications will work even better."

    It's too early to tell how well this new breed of modifications will perform. But an October Credit Suisse study showed that only 15% of interest-rate modifications and 23% of principal-reduction modifications made at the end of 2007 were delinquent eight months later, compared to 44% of adjustments that resulted in higher payments.

    "Lots of modifications have not been done with a rigorous ability-to-pay criteria. As evidence of that, we see the high redefault rates," said Rod Dubitsky, head of asset-backed securities research at Credit Suisse. "Modifications that more carefully consider ability to pay should have a lower redefault rate."

    Advocates also take heart in the relative success rate of servicers who have long focused on affordability. Take Ocwen Financial Corp. The servicer boasts of a 19.4% redefault rate, less than half the industry average.

    The West Palm Beach, Fla.-based firm says most of its borrowers remain current because of its customized approach to modifications. Ocwen looks at borrowers' income and expenses and comes up with a payment plan that the homeowner can afford long-term. The company says it has prevented more than 90,000 foreclosures since the mortgage crisis began.

    "If loan modifications are to have an enduring impact, the reduced mortgage payments must be sustainable by homeowners," Ocwen Chief Executive William Erbey said in a hearing before Congress a week ago.

    Controversial principal reductions

    Unlike most servicers, Ocwen has embraced principal reductions. Nearly 19% of its loan modifications include writing down the mortgage balance. This is an important step to achieving an affordable payment while still maximizing the payout for the mortgage investor, the company says.

    Obama's plan has come under fire for not doing more to encourage servicers to reduce loan balances, a step which would help borrowers who have seen their home values plummet. The program does allow servicers to reduce principal, but makes interest rate adjustments the primary method for achieving affordable payments.

    One in six homeowners are "underwater," meaning they owe more on their mortgage than the house is worth, according to Zillow.com. Though experts are divided in their opinion, many say that the foreclosure crisis won't be stemmed until something is done to help these borrowers - namely, principal reductions to bring the loan balance in line with the home's current value.

    "Equity in the home is a significant driver of default," Dubitsky said.

    Also, many borrowers are drowning in many types of debt, experts said. So just adjusting their first mortgage, or lien, is not enough. Ocwen, for instance, takes into account all of a borrower's obligations when calculating an affordable monthly payment.

    Debt loads beyond the mortgage are a big factor in a borrower's ability to keep up with payments, Schwartz said.

    "When you have unexpected medical expenses and a lot of credit card debt, you can have an affordable first lien, but still have someone who's in trouble," she said.

     
    Low Mortgage Rates a Mirage as Fees Climb, Eligibility Tightens PDF Print E-mail
    Written by By James Sterngold, Bloomberg   

    Brian Wickert, a mortgage banker in Butler, Wisconsin, prides himself on screening applicants carefully. That’s why he was stunned when a customer who sailed through four home loans tried to do a refinancing in January, only to be rejected by three national lenders.

    The borrower’s credit standing and income were solid, said Wickert, 47, president of Accunet Mortgage. The problem was that, with home sales plummeting along with prices, the appraiser couldn’t find the required three comparable sales in six months within a one-mile radius.

    “The business has gotten tougher than I’ve seen it,” Wickert said. “The person who has decided he wants to give himself his own personal economic stimulus package by refinancing at low rates is being stymied by the rules and the fees. Too many people are being excluded.”

    Bankers around the country say one reason the housing market hasn’t stabilized is that while mortgage rates have come down, hurdles have gone up. Rising default rates and bank losses have made lenders more risk-averse, leading to higher fees, increased insurance rates and difficulties refinancing loans.

    The average rate on a 30-year fixed mortgage dropped to 5.07 percent for the week ending Feb. 26 from 6.63 percent for the one ending July 24, according to data compiled by McLean, Virginia-based Freddie Mac. Meanwhile, the percent of mortgage applications that led to closings fell nationwide to 59 percent in the first half of 2008 from 66.3 percent in 2006, the most recent period for which data is available, theMortgage Bankers Association reported.

    ‘Too Tight’

    “Underwriting standards have changed from lax to too tight,” said Lawrence Yun, chief economist at the Chicago-based National Association of Realtors. “The pendulum is swinging too far the other way. We can’t stabilize the housing market if buyers can’t get reasonable mortgages.”

    Help may be on the way. Under the terms of President Barack Obama’s housing plan announced Feb. 18, as many as 4 million homeowners on the verge of foreclosure will be eligible to have their loans modified to reduce monthly payments. Another 5 million, whose homes are worth less than the principal of their mortgages, also may be able to refinance.

    The program, which takes effect March 4, only covers borrowers whose mortgages are owned or insured by Washington- based Fannie Mae or Freddie Mac -- about 40 percent of the total, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter. They must still prove they have a solid payment history and sufficient income to meet monthly payments, and the loan can’t be more than 105 percent of the appraised value of the home to qualify.

    FICO Scores

    Those not covered by the Obama plan will have to contend with lenders requiring higher FICO scores than in the past or charging upfront fees to borrowers with scores once considered excellent. San Francisco-based Wells Fargo & Co., the second- largest U.S. home lender, boosted the minimum score for Federal Housing Administration and Veteran Affairs loans it makes through brokers to 620 on Jan. 27 from 600.

    “A score of 700 was once near perfect,” said Gwen Muse Evans, vice president of credit policy at Fannie Mae, the government-controlled company that helps set lending standards. “Today, a 700 performs more like a 660 did. We have updated our policy to take into account the drift in credit scores.”

    Consumer credit scores, called FICOs after creator Fair Isaac Corp., range from 300 to 850. The average FICO score on mortgages bought by Freddie Mac and Fannie Mae rose to 747.5 in the fourth quarter of last year from 722.3 in 2005, according to Inside Mortgage Finance.

    Higher Fees

    Accunet’s Wickert said that a 660 FICO score would have qualified most borrowers for loans with no upfront fees in the past. Now, someone trying to borrow $200,000 with a 660 score would have to pay a 2.8 percent fee, or $5,600, he said. Even someone with a 719 score would have to pay $1,750 in cash.

    Wickert said that if customers don’t want to pay the fees in cash, he can increase theinterest rate, since the wholesale banks he sells his mortgages to would pay more for the higher rate over the life of the loan. Before the crisis, a quarter-of- a-percentage-point increase in the rate was sufficient to cover a 1 percent fee. Now, Wickert said, he needs to double that.

    Robert Satnick, a mortgage broker in California’s San Fernando Valley, said he has a customer whose efforts to refinance a loan at a lower rate might cost her about $600 a month more because the value of her condominium has declined.

    The owner has good income and a FICO score in the high 700s, he said. The dilemma is that the value of her home has dropped to about $400,000, the amount of her mortgage. As a result, banks will charge her an upfront fee of 1.75 percent on a 6 percent refinancing. She also has to buy private mortgage insurance, adding another $63 a month to her cost.

    ‘Out of Reach’

    “This is now a great opportunity to buy or refinance,” said Satnick, 44. “But getting the mortgage has gotten so hard it’s putting those properties out of reach of a lot of people.”

    Another strain on consumers is a planned increase by Fannie Mae of add-on fees called loan-level price adjustments, which lenders often pass on to borrowers. Someone with a 699 FICO score borrowing 80 percent of the value of a home used to pay 1 percent in price adjustments. As of April 1, Fannie Mae will raise that to 1.5 percent. For a borrower with a 659 score, the adjustment will climb to 3 percent from 2.25 percent.

    “These are targeted pricing adjustments aimed at aligning price with risk for the highest risk products in the market today, including interest-only loans, cash-out refinancings, low credit scores, high loan-to-value loans and condos,” said Fannie Mae spokeswomanAmy Bonitatibus.

    Staff Reductions

    Another issue is that mortgage lenders have eliminated jobs, slowing down the approval process.

    “We’re very thinly staffed because we don’t know how long this will last,” said Christopher M. George, president of CMG Mortgage in San Ramon, California, referring to the global financial crisis.

    George said he has gone from almost 800 employees in 2006 to 250. Nationwide, employment in the mortgage industry declined to 280,000 in December from 505,000 at the peak in February 2006, according to data compiled by the Mortgage Bankers Association in Washington.

    Even with a smaller staff, George said, his underwriters do more checking than in the past. Before the crisis, he said, CMG asked borrowers to fill out an Internal Revenue Service form that allowed the lender to confirm income information, though it rarely sent the form to the IRS. Now, George said, CMG sends the form in before the closing, scrutinizes appraisals and contacts banks to check on the account balances of the borrowers.

    “Everything is checked, and that makes it harder for some people,” he said.

    Refinancing Program

    Fannie Mae, taken over by the government in September after losses on its mortgage holdings, says it is doing what it can to help borrowers and is urging mortgage bankers to do the same.

    A new program called DU Refi Plus that takes effect April 4 is intended to make it easier for consumers to refinance their mortgages, even if the value of their homes has declined. Lower FICO scores will be accepted, the requirement for an appraisal or home inspection will be waived in some cases, and borrowers will be able to submit a single pay stub to confirm their salaries rather than more extensive documentation.

    Fannie Mae says it still won’t be easy to make low mortgage rates more accessible.

    “There needs to be some creativity to get back into the marketplace and get through this fear,” said Fannie Mae’s Evans. “The message we’re trying to promote is we can’t be afraid to lend. We want to get back to the mentality of looking at prudent ways to say ‘Yes.’”

    Wickert, whose mortgage-approval rate has declined to 93 percent from 98 percent a year ago, said the issue requires a flexibility that only a few lenders are showing. The customer who was rejected by three banks got her mortgage approved by a fourth, which focused on her high income and credit score, not the appraisal rule, he said, adding weeks to the process.

    “A lot of people are frustrated because the rates look good, but someone has raised the bar on them,” Wickert said.

    To contact the reporter on this story: James Sterngold in Los Angeles at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

     
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