Do You Qualify for a Mortgage Bailout?

sharon sanders · Feb 19, 2009

President Obama and Tresury Secretary Geithner are spending $75 billion to help homeowners stay in their homes. Is there something in there for you?

The quickest answer can be found by looking at how much you earn, not how much you owe. If your total monthly home payments (interest, principal and taxes) are greater than 31% of your monthly, pre-tax income you may qualify. Even if your home is worth less today than what you owe, you may be able to refinance.

Here?s an example from the Treasury Dept. Let?s say you paid $230,000 for a home in 2006. It?s now worth $189,000. If you can prove to your lender that your payments are greater than 31% of your income and you are at risk of default, you may be able to get your interest payment reduced. A subprime loan that cost you 7.5% today or $1,500 a month, could get lowered to 4.4% or $1,100 a month, with the lender and the government both picking up some of the cost of the payment reduction.

What if your payments aren?t higher than 31% of your income? The Administration has also proposed a way to help homeowners who aren?t at risk of default refinance, even if they owe more than what their house is worth. Normally it?s difficult to refinance if you owe more than 80% of what your home is worth. But under new rules you may be able to refinance up to 105% of the home?s value. Not all mortgages will be eligible. They have to be owned or insured by Fannie Mae, Freddie Mac or one of the other government-backed programs. High-value, ?jumbo? loans may not meet the test.

The new plan fixes some of the problems in the structure of the mortgage market today. There is a $1,000 incentive payment for mortgage servicers to renegotiate loans. Previously they didn?t have much incentive.
The new loans can apply to homeowners who are current in their payments. You do not have to have missed payments to get the bank?s attention. As long as the borrower stays current on their new loan they can also get an incentive of $1,000 per year for five years, applied to pay down their mortgage principal.

The new loan subsidies do not apply to second homes or investor-owned properties. The complete eligibility guidelines will be out on March 4, which is when mortgage lenders can begin accepting applications. There?s more discussion of the new plan at the White House?s blog.

http://www.businessweek.com/the_thread/hotproperty/archives/2009/02/do_you_qualify.html

kent nickell · Feb 20, 2009

Re: Do You Qualify for a Mortgage Bailout?

This plan definitely has positives and negatives but seems to key in on a salvageable part of the market in a reasonable way and set ground rules to get the system moving again...

The way this works as I understand it is that certain people who are paying over 38% of their income on their mortgage would qualify to have the banks reduce the interest on their loan to a point where it is 38%. If this is not possible then they would continue into foreclosure. If the loan is close enough to make this work, I guess even with 0% interest then the feds would step in to further reduce the payment to 31%. Apparently this could also involve principal reductions

This will be mandatory on all lenders receiving federal bailout money.

If these terms can't be met there will be other incentives to try and avoid foreclosures such as keeping the homeowner in the home but as a renter and encouraging short sales.

Allows for judicial modification of loans in bankruptcy court. (Interestingly this only applies to conforming loan limits, so that millionaire homes don't clog the bankruptcy courts)

http://www.treasury.gov/initiatives/eesa/homeowner-affordability-plan/FactSheet.pdf

http://blogs.moneyandmarkets.com/in...ails-of-obama-plan-released-with-my-comments/

The modification plan will not be accessible by speculators. In other words, it's targeted at owner-occupants vs. investors. It will only apply to mortgages under the conforming loan limit ? meaning no "jumbos." It appears the current conforming loan limits, rather than the limits in place when the borrower took out the loan, will be used to determine eligibility. The current Fannie Mae and Freddie Mac conforming loan limit is $417,000 nationally, and up to $729,750 in areas designated "high cost."

Some 40% of existing homes sold during the peak of the bubble ? 2005 ? were purchased as second homes or investment properties, according to the National Association of Realtors. Jumbo loan delinquencies are also rising quickly. Any foreclosures there would not be mitigated by this plan.

http://www.tnr.com/politics/story.html?id=0c8b381d-25b1-4655-8e9e-0e48556a5e68

The New Republic

Insufficient Boldness by Simon Johnson
Obama's housing plan is comprehensive, but not aggressive.
February 19, 2009

In the fall of 2007, the Bush Administration had a chance to stop the housing crisis before it would've reached the point of being called a crisis. The writing was already on the wall of every foreclosed property, and outside experts articulated workable versions of exactly the kind of scheme announced today by the Obama administration. But with its strong ideological preference for "market"-based solutions and its reluctance to ruffle financial sector feathers, the Paulson team preferred a voluntary loan modification program that proved almost completely ineffectual. You know the rest of the story.

At last, President Obama's housing plan starts us down a more pragmatic road. But is this comprehensive program--which could have been decisive 18 or even six months ago--sufficiently aggressive to make a difference now?

Before we get into the plan's specifics, it's important to know that there is a clear case to be made for using taxpayer money to reduce the number of foreclosures and help homeowners refinance their mortgages. On the negative side, foreclosures destroy economic value in several ways: transaction costs of foreclosure itself; reduced value of foreclosed houses and impact on houses in the neighborhood; reduced property taxes for local governments; and increased crime due to vacant houses. The death spiral of foreclosure-forced sales, falling house prices, and further foreclosures needs to be broken.

On the positive side, reducing the number of foreclosures will help support prices of mortgage-backed securities. Enabling homeowners to refinance into mortgages with lower monthly payments also increases disposable income and overall economic activity.

But, as with the banking crisis--which, too, will require taxpayer money in one form or another--the question is what form that assistance should take.

One of the strong points of the plan is that it attempts to assist both homeowners at risk of foreclosure and homeowners who are not at risk of foreclosure, but are constrained by high mortgage payments. For the former group, the program combines cash incentives for lenders to modify loans with additional cash incentives for borrowers. However, whether or not to modify a loan remains subject to lender discretion, and it is impossible to say whether the incentives will be sufficient to get the lenders to loosen up the way they should. There is also relatively little insurance on offer for modified loans outside the Fannie/Freddie safety net.

Still, a definite advantage of the plan is that it should help unblock the problem of securitization trusts. Housing loans that were "bundled" together into mortgage-backed securities have been hard to restructure, because no one has clear authority to negotiate on behalf of thousands of dispersed investors, particularly when there were multiple tranches or complex structures. For loans that have been securitized, the loan servicers who administer the mortgage can now be pressed by their regulators to modify loans. The proposed coordinated approach by regulators on this issue is long overdue.

The plan also offers meaningful assistance to those not immediately facing foreclosure, primarily by allowing people to borrow more (relative to the value of their house) when refinancing into lower-rate government-backed mortgages. Effectively, it is now easier to qualify for a refinancing, and that should leave homeowners with more available income for consumption (or saving). At the same time, substantial additional money will increase the capacity of Fannie and Freddie to buy mortgages, which theoretically will increase liquidity and reduce mortgage rates. However, the plan represents a step back from the more ambitious proposals to force mortgage rates down by guaranteeing Fannie/Freddie debt (Krugman) or funneling low-rate funding from Treasury to Fannie/Freddie (Hubbard and Mayer), or offering direct government mortgages (Feldstein).

The Obama plan is certainly better than the inaction that preceded it, and it signals that some unproductive ideology has quietly dropped away. Unfortunately, it feels like being vaccinated only after already contracting a disease; you would much rather be offered a potential cure. That cure would be expensive--particularly if it involved more money to support the modification of non-Fannie/Freddie mortgages--and it might not work. But there is little to be gained at this stage from being insufficiently bold.

Simon Johnson is a Professor at MIT Sloan School of Management and a Senior Fellow at the Peterson Institute for International Economics. He is co-founder of the global economy website, BaselineScenario.com.

sharon sanders · Feb 20, 2009

Re: Do You Qualify for a Mortgage Bailout?

I think the mortgage bailout is unfair. I think all holders of mortgages who are owner/occupants should have a chance to re-negotiate. I think the new plan is too complicated. Here is all that is needed:

1) Use current FHA limits. Taxpayers should not be responsible for multi-million dollar home bailouts.

2) No principle reduction manipulations. Allow loans to 135% of appraised value.

3) No credit check.

4) Income verification.

5) New monthly interest and principle loan payments can be up to 50% of borrower's gross income. This will help familiies where someone has lost their job or is making less income than before.

sharon sanders · Feb 20, 2009

Re: Do You Qualify for a Mortgage Bailout?

For investors/landlords of single family or duplexes -

Same as above except, instead of income verification - use verification of rent (income) of the property in question.

If a lease is signed for a year or more and there is a documented payment history from that renter or property then that owner qualifies too.

The rent must cover 80% of the new loan payment + taxes + property insurance.

mixin · Feb 20, 2009

Re: Do You Qualify for a Mortgage Bailout?

I didn't like TARP part 1
I don't like the stimulus plan
I don't like this foreclosure bailout; I suspect I'll like it even less on March 4.

They must determine why the majority of people are losing their homes and fix that first. Otherwise, what's being proposed now is just another poorly thought-out bandaid fix. *Unless* it's more about the investors/lenders than it is about the homeowners. The stuff Kent posts is over my head; so maybe there is more to this than what I'm seeing.

5) New monthly interest and principle loan payments can be up to 50% of borrower's gross income. This will help familiies where someone has lost their job or is making less income than before

Florida1, I think anyone who has a mortgage that takes half their income is doomed to failure.

Even though landlords provide a valuable service as housing providers, there is virtually no sympathy for the loss we are suffering. Here in Indiana, we have begged our legislators to help us by reducing our taxes and all we've been told is to pass on the costs to our tenants. IMO, politicians in general are so disconnected with reality, I have no idea why we feel comfortable with them making decisions about our futures.

sharon sanders · Feb 20, 2009

Re: Do You Qualify for a Mortgage Bailout?

I agree that the 50% is a stretch but in high income - high real estate cost states like California and New York many have paid this premium since the early 1980s.

I agree that real estate investors provide a valuable service by providing housing for many that can not acquire this for themselves - recent immigrants, temporary workers, and people in transition.

One thing that many are ignoring is the idea of "perceived equity". This is critical to democracy. If citizens perceive that the system is inherently unfair then they will not participate. Social problems can develop.

sharon sanders · Feb 20, 2009

Re: Do You Qualify for a Mortgage Bailout?

And if we want to get things really "rock and roll" the new loans made on owner occupied properties under this bailout program should be assumable without qualifying. Many people will have "bad" credit as we emerge from this debacle.

AlaskaDenise · Feb 21, 2009

Re: Do You Qualify for a Mortgage Bailout?

I agree that real estate investors provide a valuable service by providing housing for many that can not acquire this for themselves - recent immigrants, temporary workers, and people in transition.

I've often thought that home-ownership may not be suitable for many people, due to job relocations or the need to frequently switch jobs, hence relocate. they need another way to accrue assets and still have housing flexibility. Renting might be the best choice, not because they cannot acquire a house, but due to the highly volatile nature of their profession.

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mixin · Feb 21, 2009

Re: Do You Qualify for a Mortgage Bailout?

Around here, the higher income people are usually the transitional ones and they generally go into the luxury apartments. Only rarely do single-family housing landlords provide high-end housing; there just isn't much of a need for it.

My rentals are in town and most of my tenants haven't been homeowners because of a couple of reasons.
1. They don't want the responsibility of owning a home. Many don't even want to do ordinary care-type things such as mowing the grass, shoveling the sidewalk, cleaning the carpets, etc. OR
2. They would like to own a home but are so low income that it's just about impossible; their credit is shot, they can't keep up with even the basics.

The Section 8 program (govt subsidized) has a path to homeownership for its participants; I don't know much about it or how successful it is.

Science Teacher · Feb 21, 2009

Re: Do You Qualify for a Mortgage Bailout?

Mixin,
I think we are going to see a large movement of home owners into apartment living. It makes good economic sense.

I'm very concerned about the stimulus plan in that many homeowners will feel that it brings them long term security in staying in their homes. It may not. Paying 50% of your income mortgage payments is just not realistic.

Most of all, I think there needs to be a massive education campaign to help the American public understand finances.

sharon sanders · Feb 21, 2009

Re: Do You Qualify for a Mortgage Bailout?

Thanks everyone for a great conversation!

My concern is that for this particular program, in these economics times, families who have suffered a loss in income may not qualify to keep (i.e. refinance) the very home they may have owned for years. A higher limit of up to 50% would account for the loss of some income. When the economy improves that ratio would be less as families may be able to replace some of the lost income.

For example - New re-financed PITI payment on family home (200K @ 5.5%, 30 years + taxes + insurance) estimated to be $1536 per month.

Gross family income 2009 based on current income level (husband has lost main job and now works part-time or odd jobs, wife works) is $ 40,000.

Income to mortgage ratio = 46%

Property taxes and interest on the mortgage are tax deductible so the effective rate of the 46%, may be after tax benefits, approximately 31%.

When the economy recovers, the husband's income hopefully may increase and the effective income to mortgage ratio may lower.

mixin · Feb 21, 2009

Re: Do You Qualify for a Mortgage Bailout?

Science Teacher,
I think many tenants are chosing apartment living over renting single family homes. 5 years ago, my phone rang off the hook when I advertised; now I *might* get 6 calls per weekend.

Apartment complexes are hurting also and offering all kinds of incentives to attract tenants. Many tenants prefer living in houses to apartment living; but with all the incentives being offered and the high cost of heating the tenants pay in single family homes, many are now opting for apartment living instead.

Laidback Al · Feb 21, 2009

Re: Do You Qualify for a Mortgage Bailout?

AlaskaDenise said:
I've often thought that home-ownership may not be suitable for many people, due to job relocations or the need to frequently switch jobs, hence relocate. they need another way to accrue assets and still have housing flexibility. Renting might be the best choice, not because they cannot acquire a house, but due to the highly volatile nature of their profession.

from: http://www.america.gov/st/econ-english/2008/May/20080515152055attocnich0.837826.html

<link rel="File-List" href="file:///C:%5CDOCUME%7E1%5CARS%5CLOCALS%7E1%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><o:smarttagtype namespaceuri="urn:schemas-microsoft-comffice:smarttags" name="State"></o:smarttagtype><o:smarttagtype namespaceuri="urn:schemas-microsoft-comffice:smarttags" name="City"></o:smarttagtype><o:smarttagtype namespaceuri="urn:schemas-microsoft-comffice:smarttags" name="country-region"></o:smarttagtype><o:smarttagtype namespaceuri="urn:schemas-microsoft-comffice:smarttags" name="place"></o:smarttagtype><style>  </style> 16 May 2008<o></o>
Mortgage Markets Boost Home Ownership, <st1lace w:st="on"><st1:country-region w:st="on">U.S.</st1:country-region></st1lace> Economy<o></o>

Government helps ensure access to home loans, mitigate crises<o></o>
By Howard Cincotta
Special Correspondent<o></o>
This is the sixth and final article in a series on the <st1:country-region w:st="on"><st1lace w:st="on">U.S.</st1lace></st1:country-region> financial system and market regulation.<o></o>
<st1:state w:st="on"><st1lace w:st="on">Washington</st1lace></st1:state> -- Owning a home long has been equated with the realization of the "American Dream.? The encouragement of homeownership in the <st1:country-region w:st="on"><st1lace w:st="on">United States</st1lace></st1:country-region> has been a major factor shaping government economic and tax policies, especially in regard to housing loans or mortgages.<o></o>
In recent months, the housing market has come under intense scrutiny with a credit crisis triggered by the collapse of the subprime mortgage sector. Subprime mortgages are high-rate loans for borrowers who cannot qualify for lower-interest conventional loans.<o></o>
During the housing boom of recent years, mortgages were sold as securities. When subprime borrowers began defaulting on their loans, the shock wave rippled through the entire housing sector -- lowering median home prices for the first time in decades and doubling the number of foreclosures -- and led to swift government action. (See "U.S. Central Bank Takes Sweeping Action to Avert Financial Crisis.")<o></o>

DREAMS AND HOMES<o></o>
For much of American history, owning a home was more dream than reality, with Western settlers who built their own homes swamped, statistically, by vast numbers of urban immigrants and city dwellers who almost all rented their dwellings.<o></o>
By 1900, according to the U.S. Census Bureau, less than half of Americans owned their homes.<o></o>
Homeownership soared after World War II as a result of favorable mortgage rates, a rising economy and a housing industry that grew swiftly to meet the new demand for suburban housing. The homeownership rate topped 60 percent in 1960 and peaked at 68 percent to 69 percent in recent years.<o></o>

HOUSING AND TAXES<o></o>
"Homeownership is something this country desires," said David Lereah, chief economist for the National Association of Realtors, to the New York Times. <o></o>
The role of the housing sector in the overall economy is huge. William Poole, former head of the St. Louis Federal Reserve Bank, estimated that America's "net housing wealth" (the combined value of all household real estate and mortgages) totaled almost $11 trillion in 2006 -- equal to about 80 percent of the nation's entire gross domestic product.<o></o>
Home construction remains one of the nation's largest industries; the monthly number of housing starts and building permits is considered an important indicator of the near-future direction of the economy.<o></o>
The average American has enjoyed homeownership for another reason: homeowners can deduct from taxes the interest paid on a mortgage loan.<o></o>
What is a gain to homeowners, however, is a loss to the Treasury. Overall, the mortgage-interest deduction is estimated to represent a loss of about $80 billion annually in potential revenue to the federal government. <o></o>

FANNIE AND FREDDIE<o></o>
Housing experts cite the overall availability of mortgage funds, or liquidity, as a significant factor in the relatively high rate of homeownership. The institutions chiefly responsible for maintaining mortgage liquidity are two oddly named companies, Fannie Mae and Freddie Mac.<o></o>
The Federal National Mortgage Association, or Fannie Mae, was established in 1938 to ensure a consistent supply of mortgage funds at reasonable rates for communities and home buyers. Congress re-chartered Fannie Mae in 1968 as a shareholder-owned company funded solely with private capital.<o></o>
The Federal Home Loan Mortgage Corporation, or Freddie Mac, was created in 1970 to stabilize and expand the mortgage market as well -- in effect, competing with Fannie Mae.<o></o>
Previously, a bank would make a mortgage loan and then wait for repayment, usually for years. Now, the lending institution can replace its capital investment by selling the mortgage to Fannie Mae or Freddie Mac -- and use the money to issue a new mortgage.<o></o>
Fannie Mae and Freddie Mac package these mortgages and sell them as debt securities on <st1:country-region w:st="on"><st1lace w:st="on">U.S.</st1lace></st1:country-region> and international financial markets.<o></o>
By law, moreover, both institutions must buy a certain number of mortgages issued to low- and moderate-income people to encourage lending to the broadest range of potential homebuyers. Both companies have undertaken steps to increase mortgage funding during the current crisis. <o></o>

OVERSIGHT AND INSURANCE<o></o>
As public-private hybrids, Fannie Mae and Freddie Mac operate as profit-making companies whose shares are listed on the New York Stock Exchange. At the same time, they are supervised by an office in the Department of Housing and Urban Development (HUD).<o></o>
The primary mission of another HUD agency, the Federal Housing Administration (FHA), is to provide mortgage insurance for loans made by FHA-approved lenders. The agency has guaranteed more than 34 million home loans since its founding in 1934.<o></o>
"We're the largest issuer of mortgage insurance in the country," said Brian Montgomery, FHA commissioner and assistant HUD secretary for housing. "Our programs are critical to helping Americans keep their homes."<o></o>
Recently, the FHA announced a new program to help as many as 500,000 families facing possible foreclosure refinance their high-interest loans with lower-cost, FHA-approved mortgages.<o></o>
?We want to be able to help families who are in the right house, but [have] the wrong mortgage," said <st1:city w:st="on"><st1lace w:st="on">Montgomery</st1lace></st1:city>.<o></o>
More information on mortgages is available on the Web sites of the Housing and Urban Development Department, Federal Housing Administration and American Bankers Association<o></o>

And perhaps most important is the actual percent of equity held by homeowners.

Home equity is also an important related measure. For example, although "home ownership" as defined by this article is higher in the U.S. than Canada, American homeowners own less than 50% of their houses on average as of March 2008 (and falling as U.S. housing prices have fallen since that date), compared to about 70% equity ownership for Canadians homeowners.

From Wikipedia: http://en.wikipedia.org/wiki/Homeownership_in_the_United_States

If you have no personal stake in your "house", that is if you are just renting it from the bank, there is little incentive to work with the bank on a repayment schedule. In the past, there were unlimited buyers standing in line at banks to pick up failed mortgages and foreclosed properties. But not any more. For any mortgage bailout plan to work there will need to a mechanism to allow homeowners to keep their equity stake in their home otherwise there is no incentive to continue paying your mortgage on an "under water" property. You may as well just move into an apartment.

Homeowners are the victims, not the perpetrators, of the housing crisis. They need to be treated with dignity and fairness.

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mixin · Feb 22, 2009

Re: Do You Qualify for a Mortgage Bailout?

Then we have homeowners who have 2 different ways of thinking.

It used to be that you bought your home with the intent to eventually own it and live there until you die.

Somewhere along the line, homeowners began to use their home as a savings account. Never intending to pay off the existing mortgage but using the equity from the sale of one to move up into a more expensive one. I think stats tell us the average homeowner moves every 5 to 7 years. By the time person moves into their final retirement home, the plan usually is to have a nice little bundle of equity built up.

Of the homeowners I know who have lost their homes, I really can't call any of them irresponsible; unless we consider counting on 2 incomes to be irresponsible. Divorce, sickness and job loss are the stories I'm hearing.

Here, when they restructured taxes, the increases forced many who were barely making ends meet to walk away from their homes; especially those who had purchased within the previous 5 years and didn't have much equity. As an example, the taxes on one of my properties have increased over one hundred dollars per month; that amount of increase can be hard to absorb.

Do You Qualify for a Mortgage Bailout?

sharon sanders

Editor-in-Chief & President

kent nickell

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sharon sanders

Editor-in-Chief & President

sharon sanders

Editor-in-Chief & President

mixin

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sharon sanders

Editor-in-Chief & President

sharon sanders

Editor-in-Chief & President

AlaskaDenise

In Memoriam

mixin

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Science Teacher

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sharon sanders

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mixin

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Laidback Al

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mixin

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