The president announced his much awaited housing plan on Wednesday. Major items are:
- $75 billion in direct spending to provide incentives for lenders (and borrowers) to not foreclose or enter bankruptcy
Lenders will be paid $1,000 to $1,500 for each mortgage that they modify. They will receive up to an additional $3,000 over the next 3 years if the homeowner makes all their payments. Borrowers who make their payments could receive a $1,000 reduction in their principal balance each year for the first 5 years. This part of the bill does not provide relief for speculators/house flippers.
The purpose of these incentives is to decrease foreclosures and keep folks in their homes. For neighborhoods that have a large number of "at risk" mortgages, a decrease in foreclosures should stop further declines in housing values. Of course, this is helping many folks who made poor decisions to begin with and there is a high probability that they will not be able to make the payments on the revised mortgage. - Making it easier for people to refinance, assuming they have been "doing the right thing" and are not speculators/house flippers
Interest rates are very low now, and almost everyone would benefit by refinancing their existing mortgage. The problem is that many people do not qualify, because the value of their home has declined so much that they do not meet the existing requirement of 20% equity in their home. This plan loosens that restriction for homeowners whose mortgages are already with Freddie or Fannie.
This part of the plan assists people who have "done the right thing" and are still in trouble due to circumstances out of their control. However, the restrictions are not removed entirely. So, someone who is underwater by more than 5% will not qualify. (eg. Their home is currently valued at $200,000 and they owe more than $210,000). - $200 billion additional investment in Fannie Mae and Freddie Mac
The Treasury will invest $100 billion more in each entity. It also increases the size of the mortgage portfolio that each can keep by an additional $50 billion (up to $900 billion now). This is intended to "prop up" the mortgage market on the whole, and allow Freddie and Fannie to buy more mortgages / mortgage-backed securities. - "Cram Downs" available for bankruptcy judges to use.
Cram downs allow bankruptcy judges to reduce the outstanding principal and/or change payment terms on mortgages for homeowners filing for bankruptcy. Some argue that this will end up increasing mortgate rates because lenders will charge higher rates overall to cover the risk that bankruptcy judges may decrease the principal.
2 comments:
So let me get this straight. Homeowners who are still making their payments, but are more than 5% underwater are NOT able to refinance. But people who are on the edge of foreclosure can have their payment reduced and have the government PAY THEM?
You are correct. Seems to me that someone who has been making their payments but whose home value has dramatically decreased should be eligible to refinance at these attractive low rates, too.
As long as we are on this topic, I will switch to "opinion mode". What about people who are currently RENTING and SAVING their money so that they can one day purchase a home? This plan attempts to create an "artificial floor" for housing prices as opposed to letting prices fall to their natural levels. If they were allowed to fall, the RENTERS/SAVERS would be able to afford their dream. I am quite certain that there are many people who have encountered some bad luck and this will help them. I am also quite certain that there are many people who do not deserve these incentives, but will receive them at the expense of the RENTERS/SAVERS. Scott.....
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