Reviewing the Housing Affordability and Stability Plan I intend to dig a little deeper in the leg directed toward stability. This initiative creates $75 billion to reach up to 3 to 4 million at-risk homeowners. Oh my!!!

I wrote about the affordability section earlier and you can view that post by clicking here. I also have written an overview of the stability component. You can view the entire plan by going to the White House web site.

Section A of the stability component is an initiative to reach up to 3 to 4 million at-risk homeowners. This is being presented as a shared partnership to help people “struggling” to meet their mortgage payments. It also strives to help stabilize home prices. Sounds noble, but how is it supposed to work?

Who is this program designed to reach?

• At-risk homeowners—focusing on borrowers that have high mortgage payments as it relates to their gross income. It also intends to address in someway those that owe more than their home is worth. These borrowers may be eligible for loan modifications. Eligibility for the loan modifications will end in three years.
• Homeowners that have not missed payments—the premise is to try and reach homeowners that have not yet gone delinquent, but may be in danger of doing so. This, in my opinion, is a welcome agenda. Up to this point to be eligible for loan modifications or short sales you must be at least 30 days delinquent. By then there is little incentive for the homeowners to fight it out. You may as well give up and go into foreclosure.
• Restrictions—this is for owner occupied homes only and is limited to mortgagesless than or equal to the conforming loan limits of Fannie Mae and Freddie Mac. This is generally $417,000. This restriction to the conforming loan limit concers me. In many areas there are high levels of mortgage balances above that limit. Where is the help for that homeowner?
• Provisions for people that have high total debt levels—for this you are eligible if your total debt ratio (housing payments plus other monthly debt payments/monthly gross income) is 55% or greater. You will be required to enter a HUD certified debt counseling program as a condition to the loan modification.

How does the program work?

• Reduce monthly payments—If identified and accepted for loan modification the first target is to reduce the PITI payments down to a level of 38% of gross monthly income. Want to know what PITI means, click here. If the lender will further reduce the PITI to 31% the government will share in the cost of that reduction with the lender. Reducing from 38% to 31% the government pays half. The lender could also opt to reduce the principal and as such the government would share in the same cost as described above. Modified payments would be in effect for 5 years
• Incentives for servicers—Mortgage servicers that negotiate loan modifications under this program, will receive $1,000.00. They will continue to receive $1,000 for up to three years if the homeowner remains current. Expect a lot of call if you are running a few days late!
• Additional incentives—If the modification is negotiated while the borrower is still current mortage servicers will receive an additional $1,500.00 and mortgage holders will receive $500.00. Will the servicers and holders focus on smaller loan balances first? Greater percentage of income received on smaller loan balances.
• Additional borrower incentives—After modification if the homeowner will remain current on their payments the will receive a $1,000.00 credit to their principal balance for each of the five years. Lower payments and a possible $5,000.00 principal reduction, uh what are we doing for homeowners that are not overextended?
• Home price decline reserve payments—Set up with the FDIC a $10 billion insurance fund that will tied to a housing price index. On modified loans if home prices continue to decline holders or mortgages will be provided insurance payments. Payments can be set aside as reserves against potential losses. Any one see the possibility of the costs on this running away with us?

Measuring Effectiveness

• Protecting taxpayers—The program states that if the expected cost of the loan modification for the lender is higher than the direct cost of foreclosure, the borrower will not be eligible. Sounds like a catch here! The Treasury will not provide subsidies to reduce interest rates below 2%. Is there any one out there that would like a 2% mortgage?
• Counseling and Outreach—HUD will make available funding for non-profit counseling to improve outreach and communications. Focusing on disadvantaged communities. Can anyone say ACORN?
• Oversight and tracking data—A standardized data gathering and reporting system that will be reviewed quarterly. The quarterly meetings will be with the Treasury, FDIC, the Federal Reserve, HUD and the Federal Housing Finance Agency. I wonder how much the oversight reporting will cost, what’s left of, private industry? Is this going to be another Sarbanes-Oxley? A system with such high cost that the financial institutions (those not nationalized) will just opt out?
• Incentives to take alternatives to foreclosures—Lenders to receive incentives to completing short sales and deed in lieu of foreclosure. No cost estimates or provisions listed on this one. We all know how well the short sale provision has been working.

Well there you have it, fleshing out details now available addressing stability of the Obama plan. More details are to be made available from the government on March 4^th.

Unintended consequences, there will be many. Do you think this is a good thing? What questions do you have? What problems or opportunities do you see?

I would like to hear from you!

Stay tuned for additional posts on the Homeowner Affordability and Stability Plan

Related Post

Affordability

Stability

What the Fed is the Treasury Department doing?

Jay Williams

www.myhomeloanwithjay.com