Truth in Foreclosure

This is a continuation of a post I wrote a couple days ago about President Obama’s Homeowner Affordability and Stability Plan.

There are some major questions about the President’s new plan but the media isn’t talking about them.  So I’ll put them here and ask you to pass them around through Twitter, Face Book, e-mail…whatever it takes to get the word out because homeowners need to know.

It Won’t Help Huge Groups of People

The refinancing plan won’t help the people in the most heavily affected states like California, Arizona, Florida, and others.  It is focused on those who have first mortgages that are no more than 105% of their current market value.  The administration’s own example shows how unrealistic this is for homeowners in states heavily affected by the market freefall.

Consider a family that took out a 30 year fixed rate mortgage of $207,000 with an interest rate of 6.5% on a house worth $260,000 at the time.  Today, that family has about $200,000 remaining on their mortgage, but the value of their home has fallen to $221,000 – making them ineligible for today’s low interest rates that noe generally require the borrower to have 20% home equity.  Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.

Homeowner Affordability and Stability Plan, pg. 2

Obviously, this refinancing plan won’t help someone that was 100% financed or someone who put 20% down but has watched as their market value plummeted 50%!

If you’re in this position, the second part of the President’s plan may help you, though…it’s meant to modify loans rather than refinance.  But unlike previous mass loan mod efforts, you don’t have to be behind on your payments t use this one.

So maybe the 105% limit isn’t so big of a deal?  You just have to go for a loan mod rather than a refinance.  Or is it that easy?

It Covers First Mortgages Only

Both of the President’s plans only cover your first mortgage.  Before you can successfully enter either program if you have a second mortgage (as most people that are 100% financed do), you’ll have to get that second mortgage to agree to stay in a second position on your lien.

Normally, if you modify the first, the second would become the first lien holder because it’s the older note.  They ave to agree to staying in second or you’re hosed.

How easily this can be done waits to be seen.  But either way, the second mortgage is not paid off in either plan so you’ll still be making that payment on top of your new, modified payment.

No one told you that, did they?

It Only Covers Up to Fannie & Freddie’s Max Loan

While this won’t affect a lot of people, it does affect many people in the most heavily hit areas of the country.  It affects the people that live in areas that ’enjoyed’ skyrocketing home values.  Places like Sacramento, Modesto, Las Vegas, Fort Lauderdale, and Phoenix.

The limit for Fannie Mae and Freddie Mac is $417,000 $729,750 right now.  So if your home is currently worth more than that now, you’re out of luck under this plan.

Other Gotchas

1.  If you have a back end ratio (see Brent Lane’s article on figuring financial ratios) of 55% or over, you’ll have to agree to enter HUD certified consumer debt counseling.

2.  Your lender might not participate.  These plans will only be offered on loans held by Fannie Mae and Freddie Mac initially.  Any servicers could be servicing the loans, however, so call your servicer after March 4 to see if you qualify.

Once the program rolls out, any bank that accepts money from the Treasury Department’s Financial Stability Plan will be required to participate.

3. Your modified interest rate cannot go below 2%.  If your payment can’t be brought below a 31% debt to income ratio at a 2% interest rate, you won’t qualify unless your bank also forgives principle.

4. If the total expected cost of a mod (including the government payments to the lender) is expected to be higher than the cost of putting you through foreclosure, you won’t qualify and your lender will foreclose.

5. The Bankruptcy Cramdown (if it gets approved…it’s separate from this bill) works like this:

If you enter bankruptcy and the judge agrees to modify your loan, the amount you owe in excess of the current value of your home will be treated as unsecured debt and be allowed to be discharged.  But you must first work through every option with your lender before the judge can consider it.

Many of these facts came directly from the Homeowner Affordability and Stability Plan Fact Sheet.  I’d highly recommend reading through the entire thing yourself.

As you can see, this plan is not the savior it’s cracked up to be.  It will certainly help MANY homeowners tat would otherwise end up evicted from their homes.  But there are still many gotchas you need to watch out for.

For example, even with this plan, you absolutely must read everything your lender or servicer sends you thoroughly to make sure you’re not being taken advantage of.  They will try to make this as profitable for them as possible even though it seems they are losing money.

Pay particular attention to whether they try to take your rights to include the mortgage in a bankruptcy case and to sue for predatory lending, RESPA, or Truth in Lending Violations away.  This has been a common tactic in streamline mods.  For more info, please listen to the call Brent Lane and I did on streamline refinancing for underwater mortgages.

Look for part 3 of this article:  What you should do while you’re waiting for March 4th…you’ll be notified by e-mail if you’re on our list.  If you’re not on our list, you’re welcome to sign up below.

Update: Go to our Home Affordable Modification Info page to see if you qualify

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