Using money from the "Troubled Asset Recovery Program" (TARP) legislation passed last year to bail out the banks, President Obama has enacted a plan through the Treasury Department to help "at-risk" homeowners by giving incentives that will enable you to refinance directly with your current lender at today's low interest rates and help keep you in your home. The eventual goal of this "Homeowner Stabilization Plan" is designed to rewrite the terms of approximately 9 -10 million mortgages to provide assistance for "at-risk" homeowners who might otherwise lose their home without new mortgage terms. Over $100 billion dollars have been allocated to support the implementation of this plan. Homeowners with eligible mortgages held by Fannie or Freddie will be eligible for refinancing. Homeowners with private mortgages may be eligible for subsidized loan modifications. The plan has now been initiated as of March 4, 2009, but only accepts borrowers who entered into their loans prior to January 1, 2009. The last date that the plan is currently slated to accept new participants is December 31, 2012.
The Nuts and Bolts of the Program
If your mortgage is held by Fannie or Freddie, you may be eligible to refinance if 31% of your monthly income is greater than or equal to the monthly payment on a 30 year fixed mortgage at the current market rate. The property in question must have lost market value to the point where you have less than 20% equity, and are thereby unable to refinance on the open market. While properties with some negative equity (that are slightly "underwater") are eligible, the loan cannot be for more than 105% of the market value of the property.
If your mortgage is NOT held by Fannie or Freddie, or, if it is and and you don't meet one or more of the other criteria, you may be eligible for a five (5) year loan modification. The goal of the modification is to reduce your monthly payment to 31% of your gross (pre-tax) monthly income. This is accomplished by temporarily reducing the interest rate on the loan. If the interest rate required to reduce the monthly payment to 31% of income is less than the payment on a 30 year fixed loan at the current market rate, the interest rate on the loan is then gradually stepped back up on a yearly basis until it matches the current market rate at that time of participation.
In trying to get to a monthly payment that is 31% of your income, the lowest effective interest rate that a lender may offer is 2%. If a 2% interest rate does not result in a monthly payment that is 31% of your income, the lender might, in some circumstances either extend the term of the loan or forego principle on the loan. Principle forbearance might be on a permanent basis, but more likely it will be on a temporary basis resulting in an eventual balloon payment.
The major distinction between these two types of mortgages under the MSA is that 1) mortgages held by Freddie and Fannie could be eligible for refinancing and 2) Mortgages that are privately held may qualify for loan modification.
There is a widely held notion, fueled perhaps by the lack of valid information on the MSA, that it is only available to homeowners with mortgages held by Freddie Mac and Fannie Mae. Although the MSA makes a distinction between Freddie and Fannie mortgages and private mortgages, the relief available is actually very similar. The MSA categorizes Freddie and Fannie mortgages separately from other mortgages, because Freddie Mac and Fannie Mae are now, in effect, owned by the federal government and must conform to the direction of the Treasury Department.
* TARP and the MSA
The power to implement the MSA was given to the Treasury Department under the TARP legislation. TARP was passed by Congress in January of 2008. Although known for the bailout of major investment banks, TARP also has a provision related to troubled mortgages.
Indeed, TARP provides the Treasury Department the means by which to leverage better rates from mortgage companies. Under the guidelines for the MSA put out by Treasury thus far, if a lender has received any financial assistance under TARP (most mortgage lenders), the lender is obligated to participate in the MSA and to renegotiate new terms for struggling mortgage holders.
Under § 2 (9)(A), TARP defines "troubled assets" as,
Residential or commercial mortgages and any securities obligations or other instruments that are based on or related to such mortgages, that in each case was originated or issues on or before March 14, 2008, the purchase of which the Secretary [of Treasury] determines promotes financial market stability.
TARP, § 2 (9)(A.)
Thus, the definition of "troubled assets" to be purchased by the Treasury explicitly includes residential or commercial mortgages ... originated or issued on or before March 14, 2008." Id.
TARP delegates the implementation of the program to Treasury, providing that the Treasury will develop its own regulations in implementing what "troubled assets" to purchase. TARP. Section 101 (Purchases of Trouble Assets) provides for the Treasury to determine what troubled assets to purchase and under what guidelines:
Authority - The Secretary is authorized to establish the TARP to purchase and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary.
TARP § 101 (a) (1)
Thus, TARP gave the Secretary of the Treasury the authority to determine what "troubled assets" to purchase and under what guidelines. It is under this framework that the MSA was developed and announced by President Obama in February, 2009, and now implemented.
* Goals and Guidelines
The following is a highlight of what information is now available to consumers. The MSA is aimed at "at risk" mortgages. The primary goal is to " provide access to low-cost refinancing for responsible homeowners suffering from falling home prices." Department of the Treasury.
One of the reasons for implementation of the MSA is that mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes have a difficult time securing refinancing. (For example, if a borrower's home was worth $200,000, he or she would have limited refinancing options if he or she owed more than $160,000.) Thus, millions of responsible homeowners who put money down and made their mortgage payments on time have - through no fault of their own - seen the value of their homes drop low enough to make them unable to access these lower rates. The MSA is designed to help people in such situations.
For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year. For example, consider a family that took a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 - making them ineligible for today's low interest rates that generally require the borrower to have 20 percent home equity. Under the Treasury refinancing plan, that family could refinance to a rate near 5.16% - reducing their annual payments by over $2,300.
Working with the FDIC, other federal banking and credit union regulators, the FHA and the Federal Housing Finance Agency, the Administration has developed guidelines for sustainable mortgage modifications for all federal agencies and the private sector - bringing order and consistency to foreclosure mitigation. The guidelines include detailed protocols for loss mitigation as well for identifying borrowers at risk of default.
The Treasury Department has also issued the following summary of the benefits they expect to make available to eligible homeowners under the MSA:
* Focusing on Homeowners At Risk: Anyone with high combined mortgage debt compared to income or who is "underwater" (with a combined mortgage balance higher than the current market value of his house) may be eligible for a loan modification. This initiative will also include borrowers who show other indications of being at risk of default. Eligibility for the program will sunset at the end of three years.
* Reaching Homeowners Who Have Not Missed Payments: Delinquency will not be a requirement for eligibility. Rather, because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.
* Common Sense Restrictions: Only owner-occupied homes qualify; no home mortgages larger than the Freddie/Fannie conforming limits will be eligible. This initiative will go solely to supporting responsible homeowners willing to make payments to stay in their home - it will not aid speculators or house flippers.
* Special Provisions for Families with High Total Debt Levels : Borrowers with high total debt qualify, but only if they agree to enter HUD-certified consumer debt counseling. Specifically, homeowners with total "back end" debt (which includes not only housing debt, but other debt including car loans and credit card debt) equal to 55% or more of their income will be required to agree to enter a counseling program as a condition for a modification.
* Shared Effort to Reduce Monthly Payments: Treasury will partner with financial institutions to reduce homeowners' monthly mortgage payments.
- The lender will have to first reduce interest rates on mortgages to a specified affordability level(specifically, bring down rates so that the borrower's monthly mortgage payment is no greater than 38% of his or her income).
- Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.
- To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.
- "Pay for Success" Incentives to Servicers : Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive "pay for success" fees - awarded monthly as long as the borrower stays current on the loan - of up to $1,000 each year for three years.
- Responsible Modification Incentives: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include an incentive payment of $1,500 to mortgage holders and $500 for servicers for modifications made while a borrower at risk of imminent default is still current.
- Incentives to Help Borrowers Stay Current : To provide an extra incentive for borrowers to keep paying on time under the modified loan, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance on the mortgage loan. As long as the borrower stays current on his or her payments, he or she can get up to $1,000 each year for five years.
- Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration -- together with the FDIC -- has developed an innovative partial guarantee initiative. The insurance fund - to be created by the Treasury Department at a size of up to $10 billion - will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. This initiative provides lenders with the security to undertake more mortgage modifications by assuring that if home price declines are worse than expected, they have reserves to fall back on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index. These payments could be set aside as reserves, providing a partial guarantee in the event that home price declines - and therefore losses in cases of default - are higher than expected.
Source: Dept. of Treasury.
5. Plan Effectiveness and Other Guidelines.
The Treasury has further announced guidelines to maximize the effectiveness of the plan:
o Protecting Taxpayers: To protect taxpayers, the Homeowner Stability Initiative will focus on sound modifications. If the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible. For those borrowers unable to maintain home ownership, even under the affordable terms offered, the plan will provide incentives to encourage families and lenders to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on lenders, borrowers and communities alike. Moreover, Treasury will not provide subsidies to reduce interest rates on modified loans to levels below 2%.
o Counseling and Outreach to Maximize Participation: Under the plan, the Department of Housing and Urban Development will also make available funding for non-profit counseling agencies to improve outreach and communications, especially to disadvantaged communities and those hardest-hit by foreclosures and vacancies.
o Creating Proper Oversight and Tracking Data to Ensure Program Success: Fannie Mae and Freddie Mac will be responsible - subject to Treasury's oversight and the Federal Housing Finance Agency's conservatorship - for monitoring compliance by servicers with the program. Every servicer participating in the program will be required to report standardized loan-level data on modifications, borrower and property characteristics, and outcomes. The data will be pooled so the government and private sector can measure success and make changes where needed. Treasury will meet quarterly with the FDIC, the Federal Reserve, the Department of Housing and Urban Development and the Federal Housing Finance Agency to ensure that the program is on track to meeting its goals.
o Limiting the Impact of Foreclosure When Modification Doesn't Work: Lenders will receive incentives to take alternatives to foreclosures, like short sales or taking of deeds in lieu of foreclosure. Treasury will also work with the GSEs to provide data on foreclosed properties to streamline the process of selling or redeveloping them, thereby ensuring that they do not remain vacant and unsold.
The Treasury has also announced guidelines, recognizing that "clear and consistent guidelines for modifications are a key component of foreclosure prevention." Dept. of Treasury.
* Working with the FDIC, other federal banking and credit union regulators , the FHA and the Federal Housing Finance Agency, the Administration is in process of developing guidelines for sustainable mortgage modifications for all federal agencies and the private sector - bringing order and consistency to foreclosure mitigation. The guidelines will include detailed protocols for loss mitigation as well for identifying borrowers at risk of default; the Administration expects to announce these guidelines by Wednesday, March 4 th
* Applying Guidelines Across Government and the Private Sector: Treasury will develop uniform guidance for loan modifications across the mortgage industry by working closely with the FDIC and other bank agencies and building on the FDIC's pioneering role in developing a systematic loan modification process last year. The Guidelines - to be posted online - will be used for the Administration's new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans' Affairs and the Department of Agriculture. In addition, these guidelines will apply to loans owned or serviced by insured financial institutions supervised by the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Reserve, the Federal Deposit Insurance Corporation and the National Credit Union Administration.
* Requiring All Financial Stability Plan Recipients to Use Guidance for Loan Modifications: As announced last week, the Treasury Department will require all Financial Stability Plan recipients going forward to participate in foreclosure mitigation plans consistent with Treasury's loan modification guidelines.
* Allowing Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options: The Obama administration will seek careful changes to personal bankruptcy provisions so that bankruptcy judges can modify mortgages written in the past few years when families run out of other options. (These have not yet been implemented - see below.)
* How Judicial Modification Works: When an individual enters personal bankruptcy proceedings, his mortgage loans in excess of the current value of his property will now be treated as unsecured. This will allow a bankruptcy judge to develop an affordable plan for the homeowner to continue making payments. To receive judicial modifications in bankruptcy, homeowners must first ask their servicers/lenders for a modification and certify that they have complied with reasonable requests from the servicer to provide essential information. This provision will apply only to existing mortgages under Fannie Mae and Freddie Mac conforming loan limits, so that millionaire homes don't clog the bankruptcy courts. (Please see below, the details of this part of the Plan have not yet been approved by Congress.)
* Bolster FHA and VA Authority to Protect Investors and Ensure Loan Modifications Occur: Legislation will provide the FHA and VA with the authority they need to provide partial claims in the event of bankruptcy or voluntary modification so that holders of loans guaranteed by the FHA and VA are not disadvantaged.
6. FHA and "Community Support"
The Treasury has also implemented guidelines under the MSA to provide for:
* Ease Restrictions in Federal Housing Administration Programs, Including Hope for Homeowners: The Hope for Homeowners program offers one avenue for struggling borrowers to refinance their mortgages. In order to ensure that more homeowners participate, the FHA will reduce fees paid by borrowers, increase flexibility for lenders to modify troubled loans, permit borrowers with higher debt loads to qualify, and allow payments to servicers of the existing loans.
* Strengthening Communities Hardest Hit by the Financial and Housing Crises: As part of the recovery plan signed by the President, the Department of Housing and Urban Development will award $2 billion in competitive Neighborhood Stabilization Program grants for innovative programs that reduce foreclosure. Additionally, the recovery plan includes an additional $1.5 billion to provide renter assistance, reducing homelessness and avoiding entry into shelters.
7. Modification of Mortgage by Bankruptcy Trustee
As noted above, part of the Plan is to give bankruptcy trustees the power to rewrite mortgages. Congress is still negotiating the question of what power a bankruptcy trustee will have to modify a mortgage in bankruptcy. Currently, a trustee does not have the power to change the terms of a mortgage to avoid foreclosure. One intention of the MSA is to give bankruptcy trustees the power to modify terms to avoid foreclosure where it is possible, however Congress is still debating the details of that prong of the Plan.
All sources of info for this article were compiled from the most current guidelines available from the Treasury Department and no information was taken from private sources.
Jim Tily is a legal researcher specializing in real estate law
Currently, there is a widespread lack of information and confusion regarding the program described in this article
There is a useful website where you can use an interactive form to determine if you are eligible
http://homeaffordplan.com bridges the information gap by offering a general summary that is both abstract but complete and substantive, and offers the only form currently available to the public which allows them to determine, based on the dollar amounts specific to their situation, exactly what they are eligible for
To see if you might be eligible under the Plan, please visit: http://www.homeaffordplan.com
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