What Does It All Mean? - The Homeowner Affordability & Stability Plan

First and foremost, I want to say thank you to both TheIcon and TheDiva for inviting me on their 1st Blog Talk Radio show this past Sunday. It was an awesome experience!!! Be sure to tune in on Sundays at 6pm by visiting http://www.blogtalkradio.com/thesavvysista

I'm amazed at what big businesses and government can do when a nations back is up against a wall. I am a few days behind in posting this because of the amount of financial happenings in the last few days was overwhelming. So now that I've been able to take it all in, including the New York Post's idea of a comic strip (no comment) let's break down what it all means for you.

On Tuesday The American Recovery & Reinvestment Act of 2009 was signed into law. 24 hours later on Wednesday, President Obama announced his Homeowner Affordability and Stability Plan and with the strokes of several very nice pens, the future of over 7 million homeowners became a little bit brighter. But was does it mean for you and your neighbors and how soon will the tension begin to get relieved from this $75 billion dollar investment. Well lets begin with the facts. The gives way to new provisions that will put lenders in a do or die situation. Lenders have until March 4th to decide if they will meet the following requirements:

• Reduce the interest rates to an agreed affordability level which is set at a 38% Debt -To-Income (DTI) Ratio on the borrowers current income.
• Partner with the federal government, who will match dollar for dollar, the further reduction of mortgage payments to a 31% DTI ratio.
• Agree to maintain the newly modified payment and interest rate in place for five years and have the option to reduce the mortgage principal in order to meet this requirement. The lowest interest rate that can be obtained is 2%

So you may be wondering what's in it for the lenders and servicers, because we all have seen that generosity isn't exactly at the center of their business model. Keep in mind that many mortgage lenders OWN the servicing entities as well. You knew there was going to be some shadiness. Well here's what they'll get:

• $1000 up front for every eligible modification that servicers establish after March 4th and $3000 over 3yrs if the borrower stays current on the modified loan.
• $1500 for mortgage holders and $500 for each modification made while the mortgage is still current.

Now that you see that the lenders and servicers aren't going to be participating solely out of the goodness of their heart, be sure to call them up after you read this to make sure that they will be participating in the initiative. The will be compensated plenty of money for doing what they should have been able to do on their own all along. In essence, the funds given to participating lenders and servicers is going to determine your eligibility. If its going to cost the lender less money to foreclose on your property than it will to modify your loan, you may be in trouble. Additional funds, short sales and other measures will be made available by the initiative to offset the difference on a case by case basis because most homeowners will not fall into this dilemma.

There is a win win for current homeowners, however the eligibility requirements are as follows.

• Your mortgage MUST be a CONFORMING LOAN owned or guaranteed by Freddie Mac and Fannie Mae. Before you get too excited, double check with your mortgage holder to make sure that your loan falls within this category.
• Being late on your mortgage or at risk of going into foreclosure
• Mortgaged property MUST be OWNER OCCUPIED and the mortgage balance cannot be higher than Fannie Mae or Freddie Mac's current conforming loan limits. If you are an investor looking to flip properties or save your vacation home, sorry for you.
• If your total household expenses (mortgage, car note, utilities, etc.) is greater than or equal to 55% of your total household income then you will be required to complete a debt counseling program. Whether or not it needs to be completed before or after your modification has not been determined yet.

If you want to know what the limits are for your area,

Visit Fannie Mae:
http://www.fanniemae.com/aboutfm/loanlimits.jhtml?p=About+Fannie+Mae&s=Loan+Limits

Visit Freddie Mac: http://www.freddiemac.com/singlefamily/news/newsletter/2008/11/limits.html

Borrowers that are able to have their loans modified and stay current on their payments get a $1000 a year reduction in their principal balance for up to 5 years courtesy of the initiative. If you have met all of your lender or servicer qualifications and you are still unable to get a modification, a bankruptcy judge will have the authority to waive any balance above the homes current appraised value and modify the payment and principal balance . Now that's powerful. Considering that it is limited to the middle class homeowner properties that are within the conforming limits set by Fannie & Freddie.

Now after all of this, you're probably wearing a grin that says “this sounds great, but how can we know that we wont get the shaft for the 3rd time? Well, the Obama Administration, the FDIC and several other organizations are developing newer, stronger and more detailed guidelines that will be in place by March 4th, 2009 and will be available online. All participating financial institutions and credit unions will be required to show and prove that they have modification plans in place that strictly adhere to the guidelines that will be created.

In my opinion this plan will work well for those that need it the most and it will irritate those that it doesn't. At the end of the day, there will never be a plan that will help and please everyone, so they went for the greater piece of the pie which is homeowners with conforming loans.

Job well done Mr. President.