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Obama Foreclosure Prevention PackageThe Obama foreclosure prevention program aims to help troubled home loan borrowers by modifying loans to keep payments under 31% of monthly gross income. In addition, homeowners who have not yet missed a payment can refinance into lower-cost loans with little or no equity. Incentives are being offered to mortgage leanders, such as subsidised interest rates, but without using taxpayer money to bail out irresponsible home buyers. The package does not apply to those who have purchased investment properties, multi-million dollar homes or those who have misrepresented details on their mortgage documents. The $75 billion loan modification plan is expected to help up to 5 million homeowners. It's all about keeping people in their homes and avoiding a complete break down of the housing market. iReport: Would you walk away from your home?
EligibilityThe home loan modification plan focuses on people who are behind in their payments or are at risk of default. This includes those who are:
The current home mortgage must:
Attend counseling if their total household debt [including auto loans, credit cards and alimony] totals more than 55% of their income Loans can only be adjusted once during the term of the modification program, which will be in effect until the end of 2012. Provision is also made to eliminate borrowers' second mortgages, which will reduce their overall debt levels. Loan ModificationsHome loan servicers will modify the loans by: Reducing interest rates to a level where the homeowner is paying not more than 38% of their monthly income. The government susidy will lower that ratio to 31%. The interest rate must not go below 2%. The new interest rate will remain in place for five years At the end of the five years, the interest rate will increase by 1 percentage point a year until it reaches either the original rate or the prevailing mortgage rate at the time of the modification, whichever is lower. If rate reductions are not sufficient to get payments to 31% of income, a lender can extend the term up to 40 years, or shift part of the principal to the end of the loan at no interest. Servicers also have the option of reducing the loan's balance.
IncentivesIncentives are being offered to home loan servicers, mortgage investors and borrowers. Servicers will receive $1,000 for each loan modified, as well as additional annual bonuses if borrowers keep up with payments. Mortgage investors will receive one-time $1,500 incentive payments for restructuring qualifying loans that are not yet delinquent. Investors in second mortgages will be paid to eliminate those claims and will receive an additional $250. Borrowers who keep up with their new payments will receive up to $1,000 a year in principal reduction, for up to five years. Incentives are also provided to servicers and borrowers to enter into "short sales" or "deed-in-lieu of foreclosure" agreements with those who can't afford to stay in their homes. The bank will agree to take back the home for less than what's owed without filing for foreclosure.
ParticipationThe program is voluntary however once servicers commit to the scheme, they must evaluate all loans for eligibibility. Financial institutions that receive government money going forward must participate. Only loans where the cost of the foreclosure would be higher than the cost of modification would qualify.
Refinancing ProgramThe refinancing program open to homeowners who took out loans from Fannie Mae and Freddie Mac, allows borrowers who are current in their payments, with less than 20% equity in their homes can refinance to the current prevailing rate up to 105% of the value of their home.
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