On February 16th President Obama went to Phoenix, one of the hardest hit foreclosure areas, to unveil his The Homeowner Affordability and Stability Plan which he believes will bring stability to the housing market.

The plan's full details will not be available until March 4th, but here's a preview of the three initiatives in the meantime.

1. Refinance Initiative: Refinancing Homeowners with Less Than 20% Equity, or Owe More Than Home's Value

Families who own less than 20% equity in their homes have a difficult time refinancing and taking advantage of historically low interest rates. Therefore, the refinance initiative in the plan provides refinancing help for homeowners with less than 20% equity in their homes, or who owe more than their home is worth.

This initiative is open to homeowners who have conforming loans which are guaranteed by Fannie Mae and Freddie Mac, and who owe up to 5% more than their home is worth. According to the plan, “credit-worthy” or “responsible” homeowners can refinance their mortgage into a 30- or 15-year, fixed-rate loan based on current market rates. The refinanced loan cannot include prepayment penalties or balloon payments. For many families, this low-cost refinancing may help reduce their mortgage payments by up to thousands of dollars per year.

Here is an example of Family A (own less than 20% equity):

• In 2006: Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

• Today: Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000. Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing.
• Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.

Here is an example of Family B (owe more than their house is worth):

• In 2006: Family B took a 30-year fixed rate mortgage of $350,000 on a house worth $475,000 at the time. (The family put just over 26% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.
• Today: Family B has about $337,460 remaining on their mortgage but their home value has fallen to $400,000. Their “loan-to-value” ratio is now 84%, making them ineligible for a Fannie Mae refinancing.
• Under the Refinancing Plan: Family B can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $4,000.

2. Stability Initiative: Loan Modifications for Homeowners Facing Foreclosure

Families facing the prospect of foreclosure can benefit from this stability initiative as it encourages lenders to pursue loan modifications. Lenders are encouraged to lower homeowners' payments to 31 percent of their income by lowering their interest rate to as low as 2% or by extending the terms of the loan. In addition, lenders can also lower the principal owed by the borrower, with Treasury sharing in the costs.

Homeowners do not need to be delinquent on their mortgage to qualify for this program (which is the criticism of many current loan modifications). Investment properties are not eligible for this program.

Here is an example of Family C:

• In 2006: Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). The interest rate on their mortgage is 7.5%.
• Today: Family C has $214,016 remaining on their mortgage but their home value has fallen 18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income. Their loan is now 113% the value of their home, making them “underwater” and unable to sell their house. Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.
• Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.

How Loan Modifications Work Between the Homeowner, Servicer, Lender & Government

• A Shared Effort to Reduce Monthly Payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it 2 could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.

• “Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years. 

• Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years. 

• Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind. 

• Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.

3. Supporting Low Mortgage Rates by Ensuring Confidence in Fannie & Freddie

The Treasury will be utilizing funds authorized to it by Congress in 2008 to keep mortgage rates low by injecting capital into the GSE's. $200 billion will be used for the Treasury's Preferred Stock Purchase Agreement, and the Treasury will continue to purchase the GSE's mortgage-backed securities on the secondary market. Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.

There are more qualifications to qualify for initiatives #1 and #2, but I've summarized them in an effort to shorten this post. See the full Housing Affordability and Stability Plan Executive Summary for more qualifications.

Sources:

Housing Affordability and Stability Executive Summary

Housing Affordability and Stability Housing Example

Housing Affordability and Stability Fact Sheet