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Barack's Housing Plan Tackles Mortgage Payments Through Interest Rates, And Leaves Taxes And Insurance On The Sidelines

By
Mortgage and Lending with Mortgage Financial Group, Inc (NMLS 219650) NMLS #359029

There has been much talk these last couple of days about President Obama’s $75 Billion Homeowner Affordability and Stability Plan. The plan has several keys features to it that are designed to help current homeowners that are current on their mortgage payments to take advantage of today’s rates and possibly re-structure their loans without having to miss a payment to qualify.

Here are some of the key points:

  • Allow homeowners that are currently 80% or greater in debt to the value of their home to refinance through Fannie Mae or Freddie Mac
  • Lower monthly payments by reducing the interest rate to where the payments represent 38% of their total monthly income. In addition, the plan would match dollar-for-dollar any monthly savings from the interest payments bringing the effective ratio to closer to 31%.
  • In addition to lowering rates, lenders may reduce the principal loan amount down.
  • Lenders and servicers will paid incentives to do these modifications before a homeowner misses a payment.
  • Establish consistent guidelines across the board for Fannie Mae and Freddie Mac on all modifications.
  • Rebuild confidence in the two mortgage giants and increase their portfolio limits.

Now, there are some draw backs to this plan. Some are addressed and some are not. The first draw back being that the low interest that one gets today under the modification will only last for 5 Years. After the initial term is up, the interest rate will be slowly raised back up to the original rate. The problem with this is that home values could continue to decline or not increase enough to where the homeowner can refinance. The other issue is that the job market could still be a huge factor to where they cannot afford the increased payments again.

Another issue it that of Mortgage Insurance. This is the insurance that lenders require a borrower to pay for any loan that is greater than 80% the value of the home. With the current plan, some homeowners could have new modified loans that are at 105% . There is no mention in the plan that mortgage insurance be waived. Now, they did say that the monthly mortgage payment must be below 38%. Typically, this means PITI(MI) - Principal, Interest, Taxes, Insurance, Mortgage Insurance. So maybe they are factoring that in, but what happens in 5 years. Now they start raising the rate again back to its original rate, but this time your payment might have MI added into it. This could cause huge payment shock to homeowners, which is what really got us to where we are today.

And then there is the double whammy issue of taxes and insurance. Many areas that have the highest foreclosure rates also saw the highest increase in taxes and insurance. The spike in these payments (which are often part of the monthly mortgage payment - PITI) created payment shock for home buyers often after the first year when property taxes were re-assessed. This plan does nothing to address these issues. States can continue their practice of charging and collecting property taxes without regard to decreasing property values if they choose. And insurance companies can continue to increase their annual premiums. The plan proposal should really include these two key factors that helped lead homeowners into their current situation.

There are many more issues surrounding this plan, some good and some bad. In the end, we all hope that this plan will be the one to stop our current housing and mortgage industries decline. If it cannot stop it, then may it at least stall the decline enough to where confidence has a chance to catch up.

To read more about the plan, visit the homeowner affordability and stabilit plan fact sheet.

Comments (7)

Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

Are you saying they didn't think this through? Shocking!

Feb 22, 2009 02:10 AM
Tim and Pam Cash
Crye-Leike (Sango) - Clarksville, TN
Real Estate Professionals - Clarksville TN

Jason, sure sounds like a glorified baloon..

Feb 22, 2009 02:12 AM
Loan Survivor Real Estate Financing Expert
Purchases, First Time Buyers, Pre-Approvals, Refinance - Birmingham, MI

Not sure what you expect the federal government to do about state property taxes?  Feds have no say in this.

Here in Michigan, our annual taxable value increases are capped until change of ownership.  Property taxes can double upon re-assessment!  Nothing the Fed can do about it as Michigan citizens voted for the law that did this.

The 5 year phase-in on the interest rate is not a bad thing.  It gives the economy and homeowners plenty of time to get their financial affairs in order.  This recession and drop in home values caught everyone by surprise and it happened so quickly.  If a homeowner can't get back on their feet in 5 years and create a budget for payment increases they KNOW are coming, then they shouldn't own a home.

We can't subsidize everyone forever.  The U.S. will go broke.

Feb 22, 2009 02:56 AM
Jason Price
Mortgage Financial Group, Inc (NMLS 219650) - Tavares, FL
The Mortgage Rider

Drew,

Why can't the federal government step in and dictate what the states can charge?  They are already stepping in and dictating what businesses can do.  Why not go the next step towards socialism? We have already come this far.

Don't get me wrong, I do not want the federal government to have that or even this much power.  But lowering interest rates will not fix anything permanently if all the other issuers surrounding the problem that got us here are not addressed and mended at the same time.

And the 5 year phase-in means nothing if the economy does not turn around and unemployment decreases.  The Great Depression took between 10-20 years to correct itself.  If we do a phase-in (which is nothing more than a glorified ARM), then we will just push this issue out 5 years into the future in hopes that it will be fixed then or that we can find another alternative when it happens again.  ARMs, taxes, and insurance are what got us where we are today.  It is not the declining home values.  Homes are investments.  We all assume the risk of depreciation when we buy our homes.  Too bad we had to have a hit this bad, but home values are not the reason we have foreclosures.

Feb 22, 2009 03:09 AM
Edward D. Nikles
Ed Nikles Custom Builder , Inc. / Nikles Realty , Inc. - Milford, PA

Jason , I wonder how the Gov't gets to lower the principal amount of the mortgage & it just disappears ? How about the reduction becomes a secondary lien without interest ! At least in the future some people might actually have to pay some of it back ! What's Obama's plan for 2nd Mortgages ? Can't change 1st Mortgage w/o involving 2nd Mortgage ! Does the principal reduction have tax implications ? You would think so ! What about car loans & credit card debt ? Lots of Questions from those of us who have to continue to pay the bills !

Feb 22, 2009 06:16 AM
Jason Price
Mortgage Financial Group, Inc (NMLS 219650) - Tavares, FL
The Mortgage Rider

There is no mention of 2nds in the plan.  As for the principal reduction, I bet it is treated the same way as current modifications.

And in regards to the other debts, those are probably already shot since most people let those go before they stop paying their mortgage.  So there is no need to address those.  Besides, if the mortgage payment is reduced, then they should be able to afford these payments now. (Yeah, right.)

I wonder if when Barack leaves office and does the traditional pardoning that he will not pardon a criminal, but rather pardon all Americans of their debts.  LOL

Feb 22, 2009 06:40 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Jason, we are still trying to get a grip on this at McCue Mortgage, but my initial gut feeling is that this does not fix anything and opens us to the HUGE risk of being in even a worst position in five years.  I don't know, I have to digest this whole thing a little more.

Feb 22, 2009 01:53 PM