Homeowner affordability and stability plan

The government has just released its plan to prevent foreclosures. The plan is called Homeowner affordability and stability plan. It contains three parts; part one and part two deals with specific groups of borrowers, and part three deals with mortgage market in general by increasing FannieMae and FreddieMac lending capacity. (The link to the full press release is http://www.treasury.gov/news/index2.html) My summary is as follows.

Part one of the plan deals with borrowers who are unable to refinance today because their property value have dropped. The plan allows these groups of borrowers to refinance up to 105% of the current home value. The way I read it is basically an opportunity for borrowers who cannot refinance because the value of their property has dropped. So the plan set clear guidelines allowing the borrower to refinance up to 105% of the current property value at current interest rates within some income limitations. Financial incentives are created for both the borrower and lenders to keep mortgage payments current and in the future. It does not specifically address how Private Mortgage Insurances affects the loan, or the interest rate, or the specific income calculations to qualify and you don’t have to be delinquent to qualify. The intent of the plan appears to be to solidify the loan for both the borrower and lender, echoing some of my previous blog comments.

Part two deals with loan modification for distressed borrowers. The plan contains various proposals ranging from payment reductions, principle reductions, financial incentives, to allowing the lenders to modify a mortgage to the point where it becomes affordable for the borrower so foreclosure can be avoided. Similar to Part one, it is in keeping with the philosophy that it is better for everyone to prevent an actual foreclosure, that it benefits the borrower, the lender and the community and the overall housing market. This part specifically excludes investors, classifying them in the category including speculators, flippers and irresponsible borrowers. I would argue investors who bought properties with 20% or more in down payment are certainly not irresponsible. There are also provisions in the plan to help people who are displaced by foreclosure by creating support agencies and housing subsidies.

Part three is fairly simple. FannieMae and FreddieMac will get $100 billion injection each from the government. Further implicit and explicit support will be extended to both of these agencies to promote a vibrant and healthy environment of secondary market so rates are kept low and housing activities are not stymied. The involvement of the federal government will be extensive from direct participation of buying and selling of the MBS (mortgage backed security) to allowing bigger lending capacities to create liquidity in the market.

I feel that most of my borrowers will benefit from the third part of the plan. The details of the plan are to be announced by March 4th and we will keep you updated of its implications.