Details of $75 Billion Loan Modification & Refinancing Programs Released
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The details of the federal government's $75 billion loan modification and refinancing plans were released this morning. According to Housing Secretary Shaun Donovan, the plan could help financially stabilize up to 9 million homeowners.
The plan is outlined as 2 parts: one to modify loans for struggling homeowners and the second to refinance loans for homeowners with little or no equity.
The first is to aid homeowners currently struggling to make their payments, as explained below. These will be handled by loan servicers and are considered loan modifications, not refinances.
The second part of the plan is to refinance homeowners into low-cost fixed loans, even if they have little or no equity. Under this portion of the plan, loans held by Fannie Mae and Freddie Mac could be eligible for a refinance to lower payments for homeowners with loan-to-values up to 105%. Interested borrowers should be warned that it could take servicers and lenders up to a few weeks to implement new guidelines. Continue to check back with Quicken Loans Mortgage News for updates if you are interested in refinancing, but don't qualify under today's conventional guidelines because of the lack of equity in your home.
Eligibility for the $75 Billion Loan Modification Program
To be eligible for a loan modification, borrowers must demonstrate they are at risk of defaulting. Payment delinquency is not required (as in some previous plans), but clear documentation will be required for a homeowner to qualify for a modification. Some of the guidelines are as follows:
Homeowners must:
Sign a document stating financial hardship.
Receive financial counseling if homeowner’s total debt equals more than 55% of their current income.
Currently live in the property (Primary residences only).
Have a mortgage originated before January 1, 2009.
Document their income with pay stubs and tax returns.
Only loans within the conforming county limits ($729,500 for 1-4 unit homes, nationally) are eligible.
How the $75 Billion Loan Modification Plan Works
The loan modification plan intends to bring together all parties for the greater good – the government, lenders and borrowers.
From Treasury.gov, the government's $75 billion loan modification plan will work as follows:
The lender will have to first reduce interest rates on mortgages to a specified affordability level (specifically, bring down rates so that the borrower's monthly mortgage payment is no greater than 38% of his or her income).
Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.
To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification.
Other options to reduce the monthly mortgage payment include: reducing the mortgage principal, extending the loan term up to 40 years, or moving part of the principal to the end of the loan with no interest at all. Any modified payments will be in place for 5 years or could become permanent, depending on the client's situation.
Where does the $75 billion go?
Part of the $75 billion will be plugged into incentivizing the servicers who currently hold these loans. For coordinating an eligible modification, a servicer could be paid an upfront $1,000 and additional $1,000 per year (up to 3 years) if the borrower remains in the loan without defaulting. The government will also assist by subsidizing (paying the difference) interest rate reductions.
Borrowers can also see some incentive for keeping up with payments on their newly modified loans. They can accrue up to $1,000 per year for up to 5 years - a total of $5,000 if they make payments timely. The "payment" will be directed to their servicer who will reduce the principal balance by that amount.
The home loan modification plan will be effective until the end of 2012, but homeowners will only be allowed one loan modification under this particular plan. As of today, homeowners who think they may be eligible are encouraged to call their servicers (the lender who currently has their loan) to initiate a modification.
While this plan may not help everyone, we continue to experience historically low fixed mortgage rates. Refinancing to current mortgage rates could significantly aid many more homeowners. Also keep in mind the perfect storm for buying a home today – the new $8,000 first-time home buyer tax credit and home prices at historic lows.
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