The Obama Administration recently announced that is moving forward with the foreclosure prevention plan which they claim with help as many as 12% of homeowner nationwide. The program is geared to help homeowners avoid foreclosure for both lower income earners, up to upper income borrowers who owe more than their homes are worth. The approximately nine million American homeowners that this plan may help, is designed to shore up housing prices, slow a downward spiral in home prices, and stabilize neighborhoods throughout many areas of the USA.
Nearly 1 in 10 home mortgages is either delinquent or in foreclosure, and analysts estimate that at as many as 6 million households could lose their homes over the next three years in the absence of government action.
The banking industry has strongly resisted this proposal, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before.
Program #1: The Obama plan will create a $75 billion program to help the estimated 4 million homeowners in danger of foreclosure, by subsidizing loan modifications. This program would reduce a family’s monthly payment to as little as 31 percent of its gross monthly income.
A mortgage lender would have to first make loan term alterations in order to reduce a borrower’s payments to 38 percent of monthly income. To encourage lenders, the government would offer incentives, like a $1,000 upfront payment for every loan modified and more payments if the borrower stays current. If the lender gets the monthly payments down to 38 percent of the borrower’s monthly income, the government would then match, dollar for dollar, additional reductions to bring the payment as low as 31 percent of monthly income.
These loan modifications could be worked out in several ways, from stretching out the repayment period of a loan to reducing the interest rate or reducing the outstanding principal.
Administration officials said that this plan to help homeowners facing foreclosure did not deal with second mortgages. Second mortgages were often made by a different lender than the first mortgages, and would greatly complicate negotiations over a loan modification.
Program #2: To help homeowners who can still keep up with their payments, but who may resent the idea of rescuing others, Mr. Obama’s plan would make it easier to refinance at today’s very low interest rates.
The plan would apply to people with fairly traditional loans that are owned or guaranteed by Fannie Mae and Freddie Mac — about 30 million homeowners. The new loans would not be subsidized, but borrowers would not need to have a 20 percent equity stake in the house.
The big limitation of the refinancing portion of the plan is that it would not help most borrowers who are current, but under water. It would only be available for mortgages that are not more than 5 percent above the current market value of the house. Estimates are that this program would help less than a million of the 14 million homeowners who are under water.
Program #3: This program is more vague component of the plan is aimed at propping up the mortgage market as a whole by having Fannie Mae and Freddie Mac step up their purchases of mortgages and mortgage-backed securities. Also, government official are working with major banks to encourage a more efficient and streamlined short sale process, to help alleviate many of the delays experienced today with such transactions.
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