Will Obama's new mortgage plan really reward responsibility?
Today President Obama announced a new $75 billion Homeowner Affordability and Stability Plan to the world. It is touted as a plan that helps responsible homeowners who have not yet missed payments. However, will it really reward responsibility? Lets take a quick look at what is in the plan.
First, this plan will provide low cost refinancing for homeowners who have underwater mortgages. Since a lot of homes lost large chunks of equity in the past few years many people cannot refinance into lower rates right now. This plan basically allows people with conforming Fannie Mae or Freddie Mac loans to refinance at market rates. This actually is not very different from the existing Fannie Mae to Fannie Mae streamline loan that does not require new appraisals. The homeowners should be making ontime payments on their loans and this would just reduce their payments. This portion of the plan is supposed to help 4 to 5 million people who have mortgages guaranteed by one of the GSEs. Jumbo mortgage holders are out of luck.
The next portion of the plan is meant to stop struggling homeowners from going into foreclosure. Basically the government will give lenders incentives to modify loans so that a borrower's mortgage is no more than 38 percent of his or her income. Then the initiative would lower the payments down to 31 percent with more subsidies. This lowered rate would last for at least five years, and then be stepped up. Incentives to servicers include an up-front fee of $1000 for each successful eligible modification, and also up to $1000 each year for three years as long as the borrower is current. The borrower could also get $1000 per year for five years for staying current.
Another portion of the plan that encourages housing price stability is to discourage lenders from foreclosing on mortgages. Basically, the Treasury department will create an insurance fund of up to $10 billion to guarantee against home price decline. Basically the lenders will be receiving insurance payments on modified loans to guard against housing price drops.
Personally, I like the portion of the plan that lets responsible borrowers refinance into lower rates. I know several people who bought in the last few years and have no trouble paying their mortgages. However, they cannot refinance now because their home values have gone down 20% to 30% and their downpayment is gone. This will help them tremendously and cut their monthly payments by hundreds of dollars. The money they save could be spent on other things. It is unfortunate that it only applies to Fannie Mae and Freddie Mac loans, but I guess there is also comfort in the fact that the government cannot twist private investors' arms to accept low rates.
As to the second portion of the plan, I am not too sure how the servicer incentives will work out. In recent years mortgage servicers have been quite unscrupulous and rewarding them may not be such a good idea. I understand that many struggling homeowners are trying to do the right thing and keep their homes at all costs, but the reality is that it just may not be worth it to keep a loan that costs as much as 38% of a family's income. Considering that more than half of loan modifications failed last year, it seems like the servicers would come out the ultimate winners by collecting thousands of dollars in bonuses and then foreclosing on the homes.
More details about how to qualify for these refinances and modifications will come to light on March 4th. If you are eligible for the refinance and modifications, then you should get your ducks in order right now. Some documents you should have ready are paystubs and W-2s. You should also try to improve your credit score in case there is a lower bound on credit scores. I can see this plan helping many people reduce their mortgage payments, but many others may just end up being tied a bit longer to debt they cannot pay.
What do you think? Does this plan really reward responsible borrowers or does it stink of bank bailout? Feel free to leave your thoughts in the comments!