President Barack Obama's new 275-billion-dollar housing plan will help the ailing housing market. Those of us in the industry know that help is needed. Falling home values and foreclosed properties are two key elements that have crippled the housing industry. Does the plan outlined help everyone? Such a plan may be theoretically possible but the time it would take to put together a "perfect" plan to help everyone would certainly come at the cost of those that can be helped now. Almost certainly subsequent plans will be announced but this is a good start. The first step in saving a patient is to stop the bleeding. This plan is designed to stop the "downward spiral" in which the housing market has been trapped.
Critics of the plan fail to realize or admit that although the provisions in the plan do not help each and every individual homeowner, the plan does help everyone, either directly or indirectly. According to President Obama a foreclosed home negatively impacts the value of neighboring homes by reducing their value approximately nine percent. Underscoring the importance of the housing market, Obama warned on Wednesday that without concerted action, the housing crisis could make economic recovery impossible. Those of us in the housing industry should be encouraged by the action taken by the White House and realize that there is a light at the end of the tunnel. Since the speech in which President Obama outlined the plan, the media outlets have been talking about it but the message has been muddled. The information that has been communicated to the public has been confusing. I will attempt to outline the primary provisions of the plan.
More homeowners in good standing will be able to refinance. Currently homeowners must have a loan-to-property-value ratio (LTV) that is within strict lender guidelines in order to refinance. Since interest rates are at historic lows, nearly all mortgage holders would benefit from refinancing. However, because property values have fallen sharply in the past year and a half, many homeowners have seen their LTV rise over that time, even as they made regular payments on their mortgages. The proposal would raise the maximum LTV limit to 105% for homeowners whose mortgages are already owned by Fannie or Freddie, which allows roughly 5 million households to refinance into the current lower rates.
The second piece of the proposal involves motivating mortgage servicers to modify at-risk mortgages. The plan would pay servicers $1,000 for each modified mortgage and an additional $500 for mortgages modified before the borrower misses a payment. In order to help the estimated four million homeowners in danger of foreclosure, Mr. Obama will create a $75 billion program to subsidize loan modifications to reduce a family's monthly payment to as little as 31 percent of its gross monthly income. A mortgage lender would have to first make concessions to reduce a borrower's payments to 38 percent of monthly income. If the lender gets the monthly payments down to 38 percent of the borrower's monthly income, the government would then match, dollar for dollar, additional reductions to bring the payment as low as 31 percent of monthly income. This would enable homeowners to remain in their homes with an affordable payment. Additionally, the "pay for success" provision of the plan would pay servicers up to $3,000 over the next three years if the borrower successfully makes payments on the modified loan during that time period. These provisions are crucial to providing servicers the incentive to modify loans, rather than foreclose. Since servicers receive fees when homes go through foreclosure, without such payments servicers might have an incentive to foreclose on mortgages even if foreclosure is not in anyone’s interest. This provision in the plan would stem foreclosures, keeping more people in their homes while also preventing additional home value declines in neighborhoods with underwater mortgages.
An additional provision addresses how loan modifications are carried out. The purpose of this portion of the plan is to set clear guidelines for efficient loan modification. Uniform guidelines will make loan modification faster and cheaper for servicers. This provision will also prevent homeowners from ending up back in complex mortgages with terms and fees they do not fully understand. President Obama explained that the details of this part of the proposal would be in place within the next two weeks.
The next item in the plan addressed Fannie Mae and Freddie Mac again. Much needed help for Fannie and Freddie is pledged as part of the plan. The plan would expand federal support for Fannie and Freddie and increase the size of their mortgage portfolios in an effort to shore up confidence in the agencies and keep mortgage rates low. The Federal Reserve will work with the Treasury Department in order to buy back Fannie and Freddie securities. This component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac. This provision is part of an overall effort to keep interest rates low for everyone.
The first-time homebuyer tax credit is addressed in the plan as well. The current tax credit of $7,500 will be increased to $8,000. Most importantly, under the new plan, it will not need to be repaid. The old provision called for the $7,500 to be repaid in a period of 15 years, in essence making it an interest free loan. A first-time homebuyer would receive 10% of the purchase price of the home up to a limit of $8,000. The new proposal does not contain a provision of repayment making it a true one time tax credit. The plan does have income limits of $75,000 for a single person and $150,000 for married couples. If a borrower exceeds these income limits he or she may receive a portion of the credit.
An additional component to the plan addresses bankruptcy rules. Obama's support for changing the bankruptcy rules is intended to help "borrowers who have run out of options," according to the White House. "My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair-market value - as long as borrowers pay their debts under a court-ordered plan," Obama said Wednesday in Arizona. This portion of the plan is the only one that needs additional Congressional approval in order to be enacted.
Lastly, President Obama pledged to work with the states in order to stem the tide of foreclosures. He also committed to provide 2 billion dollars in community grants as well. The President also stated that he is going to help get the word out regarding the provisions of his plan and to let borrowers and potential borrowers know that interest rates are at historic lows and with the help of this proposal will go down even more. This last part is indeed good news for all of us in the real estate and mortgage industry because we need to get people off of the sidelines and back purchasing homes and refinancing.
The plan will take effect March 4, when the administration publishes detailed rules explaining it. Those of us in the real estate and mortgage industry represent the tip of the spear. We must all work together to do what is right for our customers and help the industry bounce back. The old adage was "what is good for GM is good for America." It is evident that even more importantly, what is good for the housing industry is good for America.
Good Luck and God Bless America,
Andres Duenas
Sales Manager
Temprano Mortgage LLC
210 West Kings Highway
Mount Ephraim, NJ 08059
(856) 292-8372 (Office)
(609) 707-5635 (Cell)
(856) 861-0068 (Fax)
www.tempranomortgage.com
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