Feb 20, 2009

The Homeowner Affordability and Stability Plan

On Wednesday, February 18, President Obama announced his intention to spend up to $75 billion for direct aid to forestall (hopefully) millions of foreclosures, and to make available $200 billion additional dollars to support refinancing of loans owned or guaranteed by the two giant federal housing agencies, Freddie Mac and Fannie Mae. The guidelines for these programs are expected to hit the press on March 4th. Here's my take on the basics of what has been announced so far.

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).
A separate part of the plan speaks to homeowners who are in default on their loans or who are at risk of defaulting. If all of the following are true, you might qualify for a program that will bring your mortgage-related payments down to a total of 31% of your gross income:
  • 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).
The plan has certainly brought out the cynics. The populist response seems to be that the plan doesn't adequately protect against "moral hazard," meaning that some undeserving people will benefit. On the other hand, many criticize the bill for precisely the opposite reason, claiming that it doesn't go far enough. The last major government attempt at foreclosure prevention -- the Housing and Economic Recovery Act of 2008 -- fell flat, primarily (in my opinion) because it asked too much of lenders and offered inadequate incentives to get the lenders to cooperate. Also, many mortgages have multiple owners -- often in other countries -- and then, as now, there is no current theory as to how to get these owners to voluntarily agree to changes that will reduce the sums contractually due to them. Still, there are important differences between this program and the last one that offer some basis for hope.

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:

Despite what's good in the bill, there are some major unanswered questions which await the March 4th guidelines. For example, in a penetrating article in the San Francisco Chronicle on February 19th, business writer Kathleen Pender has raised some vexing questions about how the bill will play out, especially the requirement that the applicants for relief be "responsible borrowers".

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.