Making Home Affordable, the program unveiled by the Obama Administration on March 4, 2009 to help homeowners at risk of losing their homes via taxpayer-subsidized reductions in their mortgage payments, is expected to help three to four million families avoid foreclosure at a cost of $75 billion over the next several years according to The New York Times.
The plan encourages lenders to modify the mortgages of homeowners who can no longer afford their monthly housing payments because of a hardship – loosely defined as “lost income, increased expenses, payment shock from an adjustable-rate mortgage, and other indications of being at risk of default” – into a 30 or 15 year fixed interest rate loan. The program, applicable only to those with mortgages owned or guaranteed by Fannie Mae or Freddie Mac, is designed to “prevent the destructive impact of foreclosures on families and communities” according to the Treasury Department.
Who is eligible?
To apply for Making Home Affordable, you must be:
- The owner-occupant of a one (1) to four (4) unit home (i.e. must be your primary residence).
- Current on mortgage payments (i.e. have not been more than 30 days late on your mortgage payments in the last 12 months).
- Have an unpaid balance that is equal to or less than $729,750 (for one unit properties; higher for two to four unit properties).
- Have a loan that was originated before January 1, 2009.
- The first mortgage cannot exceed 105% of the value of the property (ex: your property is worth $100,000 and you owe no more than $105,000).
- Have a stable income to support the new mortgage payments.
How do I know if my loan is owned or has been securitized/guaranteed by Fannie Mae or Freddie Mac?
Call your mortgage servicer (the entity you sent payment to) or lender and ask them. You may also contact Fannie Mae or Freddie Mac directly at:
- Fannie Mae
- 1-800-7FANNIE (8:00 am to 8:00 pm EST)
- Freddie Mac
- 1-800-FREDDIE (8:00 am to 8:00 pm EST)
How does it work?
A mortgage lender or mortgage servicing company will initially receive cash incentives to modify a borrower’s loan so that the monthly housing payments (principal, interest, property taxes, homeowners insurance, homeowners/condo association fees) decline to no more than 38% of the household’s monthly gross income. At this point, the government will match, dollar for dollar, the lender’s cost in reducing payments to the target affordability level of about 31% of your gross monthly income.
How is that achieved?
Step 1: The lender drops the interest rate to as low as 2%. If that lowers the monthly housing payment to 31% of gross monthly income, then that’s the rate. For example, if 3.5% lowers the monthly housing payment to 31%, then 3.5% is your rate. The rate will not go lower.
Step 2: If lowering the rate to 2% doesn’t lower the monthly housing payment to 31% of gross monthly income, the lender will then extend the term of the loan up to 40 years. Again, it doesn’t have to be 40 years. If a 2% rate over 34 years lowers the monthly payment down to 31% of income, then 2% over 34 years is your program.
Step 3: If a 2% rate and a 40-year term do not get the payment down to the target affordability level of 31%, the next step is to forbear principal. This does not mean that the lender, out of the goodness of his/her heart (can’t decide what sex “lenders” are), will chop off the principal owed. It means that the borrower pays interest on only part of the mortgage balance. The borrower still owes the same amount as before. For example, someone might owe $100,000, but pay 2% over 40 years on $75,000. However, all $100,000 must be paid back if the homeowner sells the home or refinances the mortgage later.
Note: The lowered interest rates don’t last for the entire term of the loan. They last only five years. If a lender agrees to reduce the interest rate below the current market rates of about 5%, the lender is allowed to raise the rate by as much as 1 percentage point per year until the rate is close to the prevailing rate during the week that the modification was approved.
If the lender reduces the interest rate to a level that is still above today’s market rate (i.e. 6% from 9%), the modified rate remains in place for the life of the loan.
Each lender will determine if its cost from reducing the monthly payments, after accounting for the government’s cost-sharing, would be less than the costs it would incur from foreclosing. If the result of that calculation shows that the lender’s cost in modifying the loan would be lower than the cost of foreclosing, the lender would be required to modify the borrower’s loan.
I have a first and second mortgage. Can I refinance both under Making Home Affordable?
Only the first mortgage is eligible for modification. As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible. The lender that has your second mortgage must agree to remain in second lien position.
What are the costs associated with modifying the loan?
Lenders will have to bear the administrative expense of reviewing the loans and making their cost estimates. If there are costs associated with the modification (i.e. back taxes, liens, etc.) your servicer will add those costs on to the amount you owe.
Is housing counseling required?
If the sum of all recurring monthly expenses (car payments, credit card debt, second mortgages, child support) is equal to or exceeds 55% of your gross monthly income, you must agree to participate in housing counseling provided by a HUD-approved housing counselor as a condition of getting the modification.
How do I apply for a loan modification?
Call your mortgage servicer and ask to be considered for a Home Affordable Modification. Eligible loans can be modified ONE TIME through December 31, 2012. Before calling, make sure that you have the following information and/or documents ready:
- Recent pay stubs
- Most recent income tax return
- Information about any second mortgage on the home
- Account balances and minimum monthly payments due on all of your credit cards
- Account balances and monthly payments on all your other debts such as student loans and car loans
- Hardship letter describing the circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.)
In theory, there is NO limit on the loan-to-value ratio for a modified loan. People may be eligible for help even if the value of their home is much less than the outstanding amount of the mortgage. However, persuading their lender to modify a loan that is deeply underwater is a whole ‘nother thing.
This program will help a small percentage of those in need of help. It doesn’t do a whole lot for the family whose main source of income just lost a job and whose monthly income pretty much evaporated. It won’t do much either for that person who racked up credit card debt in an effort to save his/her home. In other words, in places like Florida, specifically South Florida, where prices have fallen due to over development, mortgage fraud, and “investor” speculation, the message is pretty clear: sink or swim. A large percentage will sink.
At any rate, BEWARE of any person or organization (no matter how legit they may look) that asks you to pay a fee (especially upfront) in exchange for a counseling service or modification of a loan.
Adrian Salgado is a realtor associate with dash – real estate company and can be reached at 305-491-7179 or SalgadoA@gmail.com. You can friend him on Facebook, follow him on Twitter, and/or connect with him on LinkedIn.