Help For Homeowners at Risk of Default and Foreclosure

President Obama took two big steps forward this week in his campaign to heal the nation’s enfeebled economy: He enacted a stimulus bill and pulled back the curtain on his plans for helping homeowners.

Obama traveled to Arizona Wednesday to share the details of a $75 billion foreclosure prevention plan created to aid millions of distressed homeowners and jolt the housing market out of its stupor.

There is lots of speculation now that the plan has been enacted on how the money will be spent, who will this help and will the money be wasted. Will this be the help for homeowners at risk of default and foreclosure?

According to what President Obama said in Mesa, AZ on Wednesday, February 18, 2009, “In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to continue to deepen.  But if we act boldly and swiftly to arrest this downward spiral, every American will benefit.”

It appears the plan for homeowners is organized into three categories:

1) Help for homeowners making their payments but at risk of default and foreclosure.

• Homeowners with a Fannie Mae or Freddie Mac loan would be eligible to refinance as long as their mortgage doesn’t exceed 105 percent of the home’s current market value. Currently owners need to have at least 20 percent equity. Potential impact: 4-5 million households.

2) Help for homeowners already in default and in need of loan modification.

• For lenders that voluntarily agree to lower a borrower’s payment so that it makes up no more than 38 percent of the borrower’s income, the government would share the cost of lowering the mortgage burden to 31 percent of income. Incentives to lenders to participate include a $1,000 payment. Borrowers can receive up to $1,000 as an incentive to stay current on their new mortgage. Still in the works is a proposed provision that would allow bankruptcy judges to require loan modification (known as a cramdown) as part of a household’s restructuring. That provision requires legislation by Congress. Estimated potential impact: 3-4 million households.

3) Doubled resources to Fannie Mae and Freddie Mac.

• To encourage investors to buy the secondary market companies mortgage-backed securities, the government explicitly backstops them to up to $400 billion, twice the current amount.

Here’s what this plan will do: For the very first time, this plan helps those who have acted responsibly, played by the rules, and made their mortgage payments. This will help people who aren’t in trouble yet keep from getting in trouble. You can’t stay in this program unless you continue to make mortgage payments.

Here’s what this plan won’t do: It won’t help somebody trying to flip a house. It won’t bail out an investor looking to make a quick buck. It won’t help speculators that were betting on a risky market. And it is not going to help a lender who knowingly made a bad loan. And it is not going to help — as the President said in Phoenix (Mesa), it is not going to help somebody who has long ago known they were in a house they couldn’t afford. That’s why the President was very clear in saying this was not going to stop every person’s home from being foreclosed.

Here’s a few documents that will help you understand the plan, how it will work, and how it will affect you:

Executive Summary – Homeowner Affordability and Stability Plan
Fact Sheet
Housing Example Sheet
Q&A

If you are looking to find some help with loan modifications and need some answers to your questions be sure ask by way of a comment or contact Justin McHood our Loan expert contributor.  You can also find some other great articles in our Mortgage FAQ section.