Making Home Affordable Program

The plan is intended to help over five million owners in their homes through modification. The plan addresses some of the major obstacles that homeowners have faced when trying to avoid foreclosure. The plan gives mortgage servicers a financial incentive to change the terms of mortgages. They’ll get paid $1,000 per loan per year for three years after a modification.

On March 4, the Treasury released details on the plan. As of March 10, 2009 many servicers have yet to implement the program.

The plan was engineered to improve modification success rates (as many as half of all borrowers who get modified payment plans end up defaulting again). Under the new program, mortgages will be restructured so that home payments account for no more than 31% of the borrower’s monthly income. All debt payments, including car loans and credit cards, must be no more than 55% of pre-tax income (you need an income to participate in the program).

The formula works something like this (details are still coming-out)

(1) Lower the interest rate up to 2 points to get the payment to the 31% level;

(2) if that doesn't get you there, then extend the loan term up to 40 years;

(3) If that doesn't reduce the payment to 31%, then reduce the amount of principal upon which interest is charged until you reach the desired 31% level, and forgive all interest for the remaining principal.

It appears that the plan would modify the mortgage for a 5 year period, and it is unclear what will happen to the modified loan after that time has expired.... more to come as details are released and implemented.

PLAN HIGHLIGHTS

Borrowers do not have to be late in their payments to qualify for a loan modification.

Borrowers who are “upside down,” i.e. they owe more than their house is worth, will only be allowed to refinance if their first mortgage does not exceed 105% of their home’s value. Studies estimate that only about 25%—or 14 million borrowers—have home values high enough to support refinancing under the new program terms (if your home is worth $400,000, then you cannot participate if your loan is more than $420,000).

Borrowers get incentives (money back) for paying on time after the loan is modified.

Only loans insured by Fannie Mae and Freddie Mac are part of the program (you can call your servicer to ascertain whether your loan is eligible).

Go to financialstability.gov, a government-run website, for more information.

The plan does not address borrowers who have no income.

The plan includes a formula that lenders will use to choose between foreclosure and modification. The formula will be based on the net present value of the home, with discounts applied to the expected loss a bank would take in a foreclosure.

- More information will be added as the program is implemented.

bayconsumerlaw.com