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Obama’s Homeowner Affordability and Stability Plan

by Morgan on February 18, 2009

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The world is a buzz with Obama’s mortgage plan (titled Homeowner Affordability and Stability Plan) to stem foreclosures and the $275 billion that he’s throwing at the problem. The problem is the plan won’t work, plain and simple. But, more on that later. First, let’s dive in to the President’s Homeowner Affordability and Stability Plan to look at the details.

Who will qualify for the Homeowner Affordability and Stability Plan?

  • Complete details will be announced with the launch of the plan on March 4th, however, homeowners will need to be able to document their income and have an “acceptable” mortgage history.  This usually means being current and not having late payments, but they may allow for a late payment or two.  We shall see.
  • Homes must be primary residences to qualify.  Investment properties and second homes are not included in the program.
  • Your loan amount must fall under the Fannie Mae conforming loan limits. That’s $625,500 in high-cost areas and $417,000 everywhere else.
  • Your loan amount must be more than 31% of your monthly gross income
  • The homeowner must be able to qualify for a 30-year fixed mortgage payment with their current income.
  • People who have recently lost their job will not qualify for this refinance option, but may instead be qualified for the loan modification portion of the plan.
  • People currently in good standing (or current) with their mortgage may be eligible for a loan modification under the program.  This is a big change.  Servicers normally won’t talk to you if you’re current, but with the new program you may be able to modify your mortgage even if you haven’t missed a payment.
  • If you have a first and second mortgage the first mortgage may be eligible for modification as long as the second mortgage holder will subordinate (stay in second position) behind the newly modified mortgage.

What are the details of the Homeowner Affordability and Stability Plan?

  • Homeowners who are current on their mortgage can refinance through Fannie Mae and Freddie Mac up to 105% of the value of their home.  This means that homeowners can be in a slightly underwater in their mortgage and still be eligible.  The 105% includes mortgage fees which can range between 0-4% of your loan.
  • If you are far behind on your mortgage you may be eligible for a loan modification.  The government is providing financial incentives for loan servicers to help modify mortgages which should make it more likely that you’ll be able to modify your home loan.
  • There are financial incentives for homeowners who modify their mortgage under the plan.  If you modify your loan under the Homeowner Affordability and Stability plan and stay current for 5 years you’re eligible for up to $5,000 in incentives that are applied to your existing mortgage debt.
  • The lenders participating in the Homeowner Affordability and Stability plan need to agree to reduce mortgage payments to 38% of the borrower’s gross monthly income.  For example if you make $5,000 per month gross income then your modified mortgage payment can’t exceed $1,900 per month. Then the government will come in and help get your mortgage payment down to 31%.  Keeping with this example your payment would be $1,550.
  • $75 billion of the funds are set aside to match dollar-for-dollar the amount of reductions mortgage holders make on loans to get them from 38% of monthly gross income to 31% of monthly gross income.
  • The government is also backstopping Fannie Mae and Freddie Mac against this additional exposure by buying $200 billion in preferred stock in the two entities and upping their portfolio limits to $900 billion.

Why the Homeowner Affordability and Stability Plan Won’t Work

While this comes to a relief for the anticipated 9 million homeowners who may qualify it won’t fix the problems in the housing market because it does not address principal reductions of debt.  While your mortgage payment goes down, you still owe the whole amount of your mortgage.  The debt still exists.  Real spending and real consumption won’t pick up again until the debt burden is eased.  That is either going to happen through wholesale principal writedowns from the lenders or through cramdowns in the courts through bankruptcy.

The government tipped its hand.  It doesn’t have enough money to fix the problem through principal writedowns – it’s too expensive.  The cramdown provision is gaining steam, but will still force people in to an ugly Chapter 13 bankruptcy which is a mess in it’s own right.

My advice – if you can take advantage of this program you should do so.  If you can’t the best thing to do is hope that the Obama administration will come to the realization that this problem can’t be fixed without writing down mortgage balances and issuing low-rate notes to those people deeply underwater.

Advertisement: If you want to get a jump start on the opportunity, you can learn how to do your loan modification on your own, without paying expensive lawyers or loan modification companies, here.

Last 3 posts by Morgan

Related posts:

  1. Ross Complains But Doesn’t Convince in NY Post Op-Ed on Homeowner Affordability and Stability Plan
  2. Obama Mortgage Plan, Pays For Paying Your Mortgage
  3. Fed study: Obama mortgage plan should give money to borrowers, not banks
  4. Mortgage Plan: Who Actually Qualifies
  5. Citi Homeowner Unemployment Assist Launches for Unemployed Borrowers

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  • Jen
    Good post, thanks for breaking it down.
  • Fielding Mellish
    My guess is that they haven't fully thought through everything. (No surprise there!). Just because they authorize the GSE's to allow 105% LTV, does that mean that Fannie & Freddie will do such loans without mortage insurance? Fannie would buy a 97LTV loan right now if it had mortgage insurance, but MI can't be obtained in 97% of the USA because even though FNMA & FHLMC don't denote "declining markets" anymore, the MI companies sure as hell do. And they don't insure 97% LTV loans. Will buyers of FNMA & FHLMC mortgage-backed securities be OK with uninsured 105LTV loans in the pools? Or is it to be assumed that special securities need be crafted and that only the Fed will buy them?

    If I were the borrower and my mortgage payment were to be capped at 31% of my income, I'd be doing everything humanly possible to make my income look as low as possible. I wouldn't disclose my part-time job, wouldn't provide the paystub that shows my annual bonus, etc... If I were self-employed, this max 31 DTI provision would incent me to cheat on my taxes. Could only one spouse of a married couple apply for the modified loan, leaving the other spouse's income out of the picture?

    These schemes are attempting to undo decades of development of securitization & contract law. There will be unforeseen consequences on a grand scale - especially since the personnel are not in place to monitor the program to insure compliance.

    I predict that this program will be approximately as successful as Barney Frank's "Hope for Homeowners" from 2007 - another example of ignorant chutzpah, thinking he could just legislate his vision of how things ought to be and that everyting would magically fall into place.

    Of course we don't have the money to subsidize huge principal reductions. Ultimately we'll have to take just as big a hit, though, when we nationalize the banks & sell them for much less later. Subsidizing principal write-downs would be a much worse idea, though, because vast numbers of people who could otherwise muddle through with their current indebtedness would be incented to get in line for their government-funded bailout. We have an orderly process in place to deal witthe collpase of the housing bubble: It's called foreclosure. It's ugly for a while and it's tough on the neighborhood, but it won't last forever. Let us never forget that another name for "falling home values" is "increasingly affordable housing for would-be buyers".
  • Mitch
    If a bank is already holding a mortgage for someone that isn't paying PMI, I don't think it should be a huge deal for them to refinance that same property at a lower rate and still not pay PMI.

    The risk is essentially being reduced due to the new terms, so why start enforcing PMI? It defeats the purpose of the plan...

    I'm hoping this is how it works out, as my value has fallen and if I did a typical refi, I'd be forced to pay PMI... if I don't refi, I don't pay it... The risk is still the same to the bank!
  • bdthrill
    Me too! My understanding of the ecomonic exactly mirror yours. The risk to the bank is inherent in the existing loan. No additional risk is injected into the system on a simple interest rate refi. If the plan works as it logically should, then approximately 9 million refi will inject anywhere from $150 - $400 per month each into the market. In the aggregate this would translate into approximately $29B per year in additional spending or savings. Now that's a stimulus!
  • wondering
    How about homeowner's insuarnce and property taxes? If I escrow these myself today (not through the lender) since I paid 20% down at the time of purchase, will I be forced to escrow with the lender if I refi under the Obama plan at a LTV more that 80 LTV?
  • Milly
    As I posted down thread, the government could inject the same type of "stimulus," through reducing homeowners' monthly housing costs and narrowing the gap (thus reducing the impact on peoples' economic psyche) between monthly housing costs and home values, through increased tax deductions and tax credits tied to the homeowner's stake in the property and his remaining current on his loan. Sure, this would not help everybody, but no one approach will. This would be an efficient way to use the bailout money, and a way that would actually work.
  • John
    Excellent and well written Mellish!!
  • Milly
    Great info, especially the fact of behaviorial economics that " [r]eal spending and real consumption won’t pick up again until the debt burden is eased." But there is an avenue besides "wholesale principal writedowns from the lenders or through cramdowns in the courts through bankruptcy" to address how the disconnect between monthly housing costs and home values is causing a severe contraction in discretionary consumer spending. That avenue is TAX POLICY.

    Tax provisions could calibrate mini-bailouts to millions of households, according to their stake in their home. There are many ways the government could funnel this money to stabilizing foreclosures and defaults through freeing up individual taxpayers---a tax credit equal to four times your home mortgage interest deducation, for example, might have about the same effect on monthly housing costs as a refi. Etc.

    Here -- http://www.associatedcontent.com/article/151872...
  • Jon
    How many homes are, in todays nightmare economic situation, only 5% underwater? That seems ridiculous considering this fix is primarily aimed at those who bought homes at highly inflated prices from about 2001 to 2005. Our home, purchased in 2005, has lost 200K in value as has every single one in every huge subdivision surrounding us. I can't imagine anyone having a mortgage for 225K and having the home only drop to 200K over the last 3 years. I agree with the person who posted that this is about as likely have significant impact as Barney Frank's Hope For Homeowners waste. In my opinion there is only one way to make sure all of the lenders, including investor groups, buy into this - to have the government pay off the difference between current and renegotiated loans, and have the homeowner sign an equity share security back to the government to share 50% of any future equity back to the government, in the event the market comes back up and the home can be sold for some profit. At least that would A) make sure everyone struggling, whether your house is 200K or 600K, get some help (if help is the right thing to do at all), as well as ensure broad participation across the board by lenders/investors, as well as help the government recoup some of that paid out principal later. I'm not economist, but it seems pretty simple and certainly more efficient (again, if that type of help is even right or fair to begin with). Just an opinion.
  • maggie
    i am a federal employe for more than 15 years. now ,i am sick for the past 10 months,with no steady income,ipay my mortgage late, sometimes very late, because my family is helping me,why can i be qualifie for a loan modification.
  • elena
    i would like to see if my payment can go lower but my mortgage company they can not help u s and they say that they dont know anything abbout the program that barack obama aproved would you help us
  • hi elena,i would send them here: http://www.financialstability.gov/
  • Your statement "Real spending and real consumption won’t pick up again until the debt burden is eased" is the most dead on comment I have seen in a while. No one is talking about the false economy the Baby Boom generation has created as they lived beyond their means for years.

    This will not be fixed soon or as I figure be fixed at all. Spending habits and expectations on returns for retirement investments need to come back to earth before a real recovery can begin.
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