Housing Plan Includes $5,000 Borrower Incentive

President Barack Obama on Wednesday will formally unveil the foreclosure mitigation plan. Before the announcement, his administration as well as the Treasury Department released some details regarding the much-anticipated plan, which will cost $75 billion — $50 billion of which will come from the Troubled Asset Relief Program. The Treasury also said it is increasing its preferred stock purchase agreements with the GSEs to $200 billion each from the original $100 billion level. The Homeowner Affordability and Stability Plan targets an estimated 5 million at-risk homeowners with loans owned or guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE). The modifications will consist of refinances designed to increase affordability of mortgage payments. “We must stem the spread of foreclosures and falling home values for all Americans, and do everything we can to help responsible homeowners stay in their homes,” Obama said Tuesday before signing the $787 billion American Recovery and Reinvestment Act. “The objective of the Homeowner Affordability and Stability Plan is to provide borrowers with a safe loan program with a fixed, affordable payment,” White House officials said in a media statement. The plan will allow eligible borrower that are current on their mortgages — but whose homes have declined in value — to refinance into lower interest rates on a 30- or 15-year mortgage with Fannie or Freddie, whichever GSE holds the loan. The program is eligible for loans where the new first mortgage including refinance costs will not exceed 105 percent of the current market value of the property. It will apply to first mortgages that meet the LTV ratio after refi, regardless of whether there’s a second loan on the property, but the lender holding the second mortgage must agree to remain in the second position. The program is slated to start March 4, when further eligibility details will be announced. The program will be limited only loans held or securitized by Fannie or Freddie. It will not involve modifications with principle forgiveness or forbearance on loans held by the GSEs. Several factors that determine eligibility are a monthly mortgage payment more than 31 percent of monthly gross income, occupancy of the home in question as a primary residence, and a loan amount that is within current Fannie and Freddie loan limits. It also applies to borrower that have not yet fallen behind but are at risk of becoming delinquent. The program also offers incentives for lenders to modify mortgages of anywhere from 3 to 4 million borrowers behind on payments and at risk for foreclosure. It states that a servicer will receive $1,000 for each modification, plus additional funds for each month the borrower remains current on payments. It also offers a financial incentive for borrowers to “work hard to retain homeownership,” in the form of a payment up to $5,000 directly on the borrower’s mortgage debt. The payment will accrue on a monthly basis for borrowers that pay on time for five years and will be applied to the borrower’s debt at the end of that period. Write to Diana Golobay at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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