Mortgage help: a Goldilocks approach

New programs try to help troubled homeowners. Which one is just right for you?

It's not too hot … it's not too cold … it's just right! In today's housing markets, some troubled homeowners and would-be home buyers may find comfort in that Goldilocks refrain as they try to qualify for the myriad new housing programs offered by the Obama administration to stabilize the real estate market.

The $275 billion housing stimulus program, with its comforting title "Making Home Affordable," includes $75 billion in foreclosure-relief assistance targeted at the 1 in 5 US homeowners who owe more than their house is worth.

The effort includes a mortgage-modification program intended for up to 4 million borrowers.

Each borrower will be screened based on highly exact terms: Loan amounts may not exceed $729,750 for a single-family home, with higher limits on multiple-unit homes; it must be verified that the home serves as the primary residence for its owner occupant; the home­owner must document that he or she has suffered financial hardship, limiting income – whether through loss of a job, initial deceit regarding income during the underwriting process, or failure of the lender to apply income documentation standards; and, most important, there must be an outstanding loan balance greater than the value of the home.

You don't have to be behind on your mortgage payments to qualify, and no minimum or maximum loan-to-home value ratio is set.

In addition, those who qualify will be required to participate in debt counseling. Such advice is necessary so homeowners don't build another negative mortgage record, as they may qualify only once for a loan modification through Dec. 31, 2012.

For those who do qualify, lenders and the US Treasury will jointly reduce payments to 31 percent of a borrower's income and offer a bonus of up to $5,000 in principal loan reduction – $1,000 a year for five years – for timely payments.

Don't fit those qualifications? Don't panic. Perhaps your remedy is the newly heralded refinance program expected to target another 5 million homeowners. This program is directed at homeowners with home loans from Fannie Mae or Freddie Mac. The two mortgage finance companies own or guarantee more than half of the nation's 52 million mortgages.

In order to qualify for more affordable, fixed-rate loans, homeowner's existing loans must be in good standing and their home's value must be no more than 5 percent below what they owe on it. Applications for this program must be filed no later than June 2010.

Another option, this time for first-time home buyers, is the $8,000 refundable tax-credit program for those who purchase a home in 2009. This measure was part of the economic stimulus package signed by President Obama last month.

Seeking to raise revenue to support these programs – as well as new healthcare and other budget initiatives – the Obama administration has proposed to reduce the mortgage interest deduction (MID) for couples with incomes of more than $250,000 and individuals making more than $200,000. This proposal will limit the itemized deduction for taxpayers in the 33 percent and 35 percent tax brackets, shaving the homeowner tax deduction by 5, 7, or potentially, 11 cents on the dollar. If passed, it would raise revenues by an estimated $318 billion over 10 years.

Three out of 4 homeowners utilize the MID, permitting them to deduct mortgage interest on debt up to $1 million for a principal residence and one additional home. The government will lose an estimated $80.1 billion in revenue from the MID this year, according to the Joint Committee on Taxation. Some 30 percent of that subsidy primarily benefits the roughly 4 percent of Americans who earn more than $200,000.

Mary Trupo, spokeswoman for the National Association of Realtors, opposes the reduced MID. "In an unstable market, any change in homeownership incentives will have a magnified effect on prices," she says.

But Danilo Pelletiere of the National Low Income Housing Coalition disagrees. "The MID is an extremely regressive measure, which does nothing to boost housing affordability or impact the overall housing market," he says. "People with over $200,000 in income will be only marginally impacted by this MID reduction, at most choosing to buy a less expensive home."

Over the next several months, Congress and the Obama administration will continue to monitor economic and housing data, hopeful that a recovery is under way. Both a further expansion of eligibility for the mortgage assistance programs and an extended period of program relief may be considered if economic goals have not been met.

Dr. Kathleen Connell is a professor at Haas Graduate Business School, University of California, Berkeley.

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