Do you qualify for help under President Obama's latest foreclosure prevention effort, announced Friday?
Here's a quick take on who may be eligible under the new home-loan programs, which include aid to borrowers who become unemployed and incentives for lenders to reduce loan balances for underwater borrowers. The information comes from Obama administration statements and a Friday analysis of those plans by economists at Goldman Sachs in New York.
Three months of mortgage relief for the unemployed
For three months, jobless mortgage holders get temporary forbearance on their mortgage loan. They'll still have to pay 31 percent of their monthly income, but not the full amount they usually have to pay each month on the loan. Loan servicers participating in the Making Home Affordable Program – which includes many big lenders – are required to offer assistance to all jobless borrowers who meet eligibility criteria.
To be eligible, you must show that you are drawing unemployment insurance benefits, that you live in the home, and that the loan was originated before Jan. 1, 2009. The loan balance must be below $729,750. You can't be more than 90 days delinquent in your payments.
FHA refinance loan
Participation in this Federal Housing Administration program is voluntary, with the government providing incentives to encourage lenders to offer principal (loan balance) relief to borrowers at high risk of foreclosure. The target group is borrowers deeply "underwater," with loan balances far above the current value of their home. The idea is to get a win-win outcome, where borrowers stay in their homes and lenders don't lose as much as they otherwise might by foreclosing.
Lenders must agree to reduce the principal balance by at least 10 percent on a first-lien mortgage. After refinancing, the first mortgage can't be larger than 97.75 of the home's value (the current FHA limit) but the total loan-to-value ratio (with a second lien) may be as high as 115 percent. In many cases, this will mean substantial write-downs (losses) for both first- and second-lien lenders.
To qualify, borrowers must be current on their existing mortgage payment, occupying their home, and qualify under standard FHA underwriting guidelines – including a FICO credit score of at least 500. The new loans can't result in a monthly payment higher than 31 percent of borrower income. Many borrowers won't qualify, but many also will.
Other mortgage relief
When evaluating what to do about at-risk loans, mortgage servicers in the Home Affordable Modification Program (HAMP) will be “required to consider” principal writedowns if the loan-to-value (LTV) ratio is greater than 115 percent. They will compare whether this would result in a higher "net present value" of the loan (to the bank or investors who own it) than other loan-modification options under the HAMP program.
So if your loan is being reviewed under the HAMP program, you'll be considered. This program will allow some homeowners with negative equity to reap a reduction in the principal balance in steps over three years, if they remain current on payments.
To encourage lenders to opt for loan-balance reductions, the government will offer lenders 10 cents per dollar of principal written down above 140 percent LTV, 15 cents between that level and 115 percent LTV, and 21 cents for LTV reductions below that. Second liens that are more than six months delinquent will get a standard 6 percent incentive payment, according to the Goldman Sachs report.
When will all this start? Soon, the administration says, but there's no set date. Some parts will be operational within the next few weeks, and all the elements (not all of which are discussed here) should be in place by this fall, the Obama administration says.
For updates and more information you can check the White House's "home affordable" website. The site also has interactive steps to help you determine whether you're eligible for government-backed programs.