HOMEOWNER AFFORDABILITY AND STABILITY PLAN: PART II “STABILITY"

The second part of the plan announced last week to help troubled homeowners gets at the core of the problem:  how to help “at risk” homeowners who are struggling to keep their homes.  The key objective of the “Stability” piece of the plan is to reduce monthly mortgage payments to sustainable levels for those committed to keeping the homes in which they live.  If you’re a flipper, an investor, or worried about your vacation home, you can stop reading here.

We’re still waiting for March 4th and more detail, but here’s what we know so far:

Do I have to be behind on my payments?  No, this is a big improvement over previous efforts.  You qualify without falling behind on payments if you can show that you are “at risk of imminent default” due to loss of income or employment, a big increase in your expenses, or a bad loan that is resetting to an unaffordable level.  Following the FDIC’s model of their IndyMac bank takeover, the government wants lenders to pro-actively send letters to those who appear to meet the eligibility requirements.  That will take a few weeks after the March 4th announcement, and the phones lines will be busy, so patience may be needed.

Will this reduce my principal balance?  It could.  Unlike Part I, this part of the plan offers incentives to lenders to reduce principal balances if other measures fail to bring payments down to 31% of your monthly income. Principal reduction is  still voluntary and will be the last resort for lenders, but at least there are now financial incentives in place to encourage lenders and servicers to consider this.   Furthermore, if you exhaust all other options and are forced to seek protection under the bankrupcty laws, it looks like the courts will have the ability to  “cram down” the principal balance, allowing you to keep the home with a lower payment.

Will all lenders be doing this?  No–and this is sort of a weak spot–it remains a voluntary program, but the government has placed substantial incentives on the table and expects most major lenders to participate.

What incentives will lenders have to participate?  The government is going to pay loan servicers (the bank who sends your monthly statement but may not actually own the loan) $1,000 upfront for each loan they successfully modify plus an additional $1,000 per year for three years if the borrower stays current on the loan.  To encourage lenders to work with borrowers who are not yet in default, additional incentives are paid to banks and servicers who modify loans before the borrower falls behind.  Finally, a $1,000 per year (up to five years) is actually offered to the borrower who stays current on the modified loan for the ensuing five years.  This goes toward reducing principal even further.  Pretty good stuff.

How do I qualify?  The home must be your primary residence, the payments must exceed 31% of your current income, and your loan must not exceed the current Fannie Mae/Freddie Mac loan limits for your area.  The standard national limit has been $417,000, however there were higher limits imposed in some areas for 2008, and the Plan reestablishes those for the rest of 2009.

What do I do between now and March 4th?  If you think you may qualify, then get ready by organizing your current income: pay stubs, tax returns, and anything else; your expenses for your mortgage, property taxes, car payments, student loans, credit cards; and documenting and explaining any hardships that have contributed to your current inability to make your mortgage payments.

So, we wait for March 4th to know the rest of the story, but to summarize, Part I offers a little bit of help to “responsible” homeowners who can currently afford their payments.  Part II creates incentives that encourage banks and servicers to work with “at risk” homeowners before they get behind and damage their credit; offers the possibility of principal reduction to create a livable payment;  and will pro-actively contact homeowners who may be eligible.

All in all, this is an improvement over the litany of half-hearted, watered-down efforts previously made.  Let’s hope it has the desired effect.