You might qualify for a refinance at a 15- or 30-year fixed-market-interest-rate (currently a little over 5%) if all of the following are true:
- The loan to be refinanced is a conforming loan.
- Your loan is owned by Fannie Mae or Freddie Mac, or it has been sold by Fannie or Freddie as part of a mortgage-backed security (that is, it's been "securitized").
- You have a history of being current on your payments.
- The mortgage to be refinanced is on your principal residence.
- Your first mortgage is 5% or less over the current value of your home. (For instance, if your home is worth $300,000, you can't qualify if you owe more than $315,000.)
- If you have a second mortgage, the mortgage holder voluntarily agrees to continue to play second fiddle (which may be a hard sell).
- Your mortgage loan is conforming.
- Your mortgage-related payments exceed 31% of your gross income (which, by definition, will put you at risk of defaulting if you aren't already in default).
- If your current debt-to-income ratio (mortgage debt over gross income) is higher than 38%, your lender will agree to changes that will bring this number down to 38% or lower.
- The mortgage being modified is on your principal residence (in other words, investors and flippers not welcome here).
Perhaps most importantly, incentives are being offered to the various parties to do their part. Especially important are the incentives to the mortgage servicers (the folks you make your payments to and negotiate with if you get into trouble). Under current contracts between lenders and the servicers, the servicers make more money off foreclosures than they do off keeping you in your home. Under the new plan, the servicers will be incentivized to keep you from defaulting in the first place and to arrange for a workout designed to keep you in your home for the long haul.
In addition to announcing how he will use existing authority and appropriations to prevent foreclosures, President Obama also announced:
- his support for legislation that would allow Chapter 13 bankruptcy judges to modify residential mortgages on a case-by-case basis
- his intention to require all future recipients of federal money to comply with the modification procedures and standards that are being established in his plan, and
- his plans to piggyback this most recent plan on top of the HOPE for Homeowners Act (part of the up-to-now failed Housing and Economic Recovery Act of 2008).
Personally, my biggest problems with the bill are: 1) in the heavily impacted parts of the country, people are underwater much more than 5% over the value of their house, and in many of the impacted coastal urban areas, the loans are non-conforming (that is, jumbo) loans, and 2) I strongly believe that making the mortgage modification power available to Chapter 7 as well as Chapter 13 bankruptcy judges would greatly expand access to that remedy by homeowners who have no other option.
Again, we'll know more on March 4th and have a better view of the devils lurking in the details. Look to the Nolopedia's Bankruptcy & Foreclosure resource centers for more comprehensive articles in the weeks following March 4th. And for now, take a look at the Q&As published on the U.S. Treasury's website (PDF) to get more information.