The Treasury Department released its plans this week to address instability in the housing market by providing relief to certain homeowners who might be having difficulty with their mortgage payments.
The government announced two separate types of programs -- (1) a Refinance Program, and (2) a Modification Program -- which have different purposes, guidliness, and eligibility. We thought these programs were a little complicated, so even though the government has set up a very helpful FAQ on them, we wanted to break them down and provide links to the various resources to help you understand them.
1. The Refinance Program
The Refinance Program is not designed for people in default, or facing foreclosure. Rather, it's aimed at homeowners who are current on their mortgage, but simply need to refinance a home that has gone down in value since they purchased it. Many of those homeowners can't refinance right now, the loan amount is more than 80% of the home's value-- ie., they made a down payment when they purchased the home, but now the value has gone down and they can't refinance because there is not enough of an equity cushion for the bank. This plan allows them to refinance that loan up to 105% of their home's value, so long as the loan is owned or guaranteed by Fannie Mae or Freddie Mac.
The purpose of the Refinance Program is to help people who are NOT in default, but might fall into default if they cannot refinance their mortgage. Here are the eligibility requirements, and you can also do a self-assessment at the government's site:
- You have to live in the home. No second homes or investment homes.
- You have to have a solid repayment history.
- Your loan must be below $729,750 (if it's a single-family home), and must have been taken out prior to January 1, 2009.
- You must have enough income to handle the payments under those loans.
- You can have a second mortgage on the home, but the first mortgage that's being refinanced can only be refinanced to 105% of the value.
- Your loan must be owned or guaranteed by Fannie Mae or Freddie Mac. If you're not sure whether your loan qualifies, you can call Fannie at 800-7FANNIE or Freddie at 800-FREDDIE.
If you think you qualify, or would like to know more, contact your mortgage service provider. You can find the contact information on your most recent mortgage bill. If you want to apply, you'll need the normal documents for a refinance: two recent pay stubs, your latest tax return, information about any second mortgages, and information on other debts. The Refiance Program is running from now until June 2010.
2. The Modification Program
The Modification Program is a much more aggressive attempt to help homeowners avoid foreclosure by incentivizing (and in some cases requiring) banks to re-work the loans. Under this plan, you can modify the terms of your mortgage with your lender, who will receive incentives from the government to reduce your monthly payments so that they are no more than 31% of your monthly income.
How will the lender reduce your payments? By reducing your interest rate (to as low as 2%), extending the loan for up to 40 years, or writing off some of the principal of the loan. If the lender absorbs some of those costs, the government will provide financial incentives and assistance, including bonuses to the service provider if you stay current with the loan after modification. Your loan rate will be significantly lower than today's rates, will stay fixed for five years if you make the payments, and after five years will be capped to be no more than the rates on the day you did the modification.
This is a much more powerful program for helping struggling homeowners. Contrary to some reports on the program, you do NOT need to be in foreclosure, or behind in your mortgage, in order to qualify for the Modification Program. You simply need to be in a situation where you are "at risk" for imminent default -- for example, you are not behind, but your loan is about to re-set to a much higher rate that will make payments unaffordable.
The program is voluntary for lenders, except that (1) lenders accepting TARP funds must participate, and (2) any lender that participates has to review ALL of its loans for eligibility. Some reports indicate that banks will take a few weeks to get their systems up and running for doing these reviews, so you should contact your loan company and be patient.
We will clarify some of the eligibility requirements below. Because we've seen confusion with people mixing up the two plans let's first clarify that for the Modification Plan, unlike the Refinance Plan, your loan does NOT have to be owned or guaranteed by Freddie or Fannie, and there's no requirement that your loan amount can only be 105% of your home's value.
Here are some of the eligibility requirements:
- You have to live in the home. No second homes or investment homes.
- Your loan amount must be below $729,750 (if it's a single-family home), and must have been taken out prior to January 1, 2009.
- Your loan amount must currently be above 31% of your income.
- You must have sufficient income that you can make the payments for a re-worked loan.
- You have to sign an affidavit attesting to financial hardship and your need for the program.
Also, to get help under the program, you have to be "at-risk", which has been defined by the government as follows: suffering serious hardships, such as declines in income or increase in expenses; facing an interest rate hike; having high mortgage debt compared to income; owing more than their house is worth; or demonstrating other reasons for being close to default.
If you want to find out more, contact your mortgage service provider -- just look for a phone number on your most recent mortgage bill. You'll need to provide the normal documentation (pay stubs, tax returns) along with the affidavit. According to some reports, the bank HAS to allow you to perform the Modification if the costs of modification would be less than the cost of foreclosing.
Avoiding Foreclosure
Finally, one last thing. If you are having difficult with your loan, and you would like to talk to someone, go to the FREE foreclosure avoidance counselors provided by the government. In other parts of the country where the foreclosure problem has hit harder, we have seen predatory companies provide "counseling" services that are mostly a scam to get you to give them money. The government has resources for this, so use them. You can find a list of New York HUD-Approved foreclosure avoidance counselors here. And if you're interested in some other materials, we have a host of videos from a foreclosure avoidance workshop that we conducted a few months ago here.
News Coverage Links
If you want to read more about the program, some links (we will update as we find them):
New York Times overview of the program.
NYT piece about how homeowners with higher-value homes are not eligible.
Times-Herald Record overview on the impact for struggling families.
Times Herald Record report on how the programs could help Orange County homeowners.
US News and World Report overview of the program: Seven Things You Need to Know.
We hope this is helpful. If you have any questions, feel free to post and we'll either update or post a response. If you need further information, visit me here.
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