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Obama’s Housing Plan: What does it mean for you?

Last week, President Barack Obama unveiled a comprehensive plan to address the housing crisis and help the millions of families who have been hit by recession. The $75-billion plan is designed to reduce foreclosures through refinancing, loan modification, and other forms of assistance.

Experts are still divided on whether this plan is another band-aid solution, or will actually work for the long term. But one thing’s for sure: if your mortgage has put you in a financial rut, Obama’s housing plan can give you the leverage you need to get back on track. Here’s a rundown of the President’s plans and what they mean for you as a homeowner.

State-backed refinance

Under the planned refinancing scheme, borrowers who currently have conforming loans can get them refinanced to better terms through their current lenders. Depending on your qualifications, your lender can offer you a Fannie Mae or Freddie Mac-backed loan with a lower interest rate. Key requirements include occupancy (you must reside in the property) and proof of household income.

But how does it really help? The benefits of this new refinancing program are geared towards people whose homes have depreciated, or declined in value. This makes them ineligible for regular refinancing, as they don’t have enough equity to make the loan worth it. With Obama’s refinancing plan, people with little or even no equity can qualify for a refinance and better afford their homes.

Reward systems

If you’ve weathered the crisis and kept your mortgage up to date, can you still benefit from the program? Definitely—the plan is designed to reward timely borrowers by giving them access to even better financing terms. This way, refinancing best fits those who made reasonable choices and stuck to them. It also reduces the likelihood of a timely borrower walking away from a bad mortgage, and keeps the collective value of community housing from collapsing due to foreclosures.

Loan modifications

Loan modification rose to prominence last year as a promising fix for people in deep financial crisis. It allows the borrower, usually backed by a loan modification attorney, to negotiate better terms with the bank so that he or she can better afford the payments. Millions of loan modifications were granted last year, but the lax terms meant that delinquent borrowers would remain delinquent after a loan modification, often resulting in second defaults (and even bigger losses for the lenders).

The new program will restrict loan modifications so that only at-risk borrowers—officially, those who spend more than 38% of their income on mortgage payments—can qualify for assistance. The program gives lenders the option to either reduce the principal or lower the interest rate, so that it meets the 38% debt-to-income ratio. The government will split the additional cost with the lender, further reducing the payments to a comfortable 31%.

Bankruptcy

The program will also boost previous measures to allow bankruptcy loan modifications. Under this plan, bankruptcy courts can modify mortgage loans on properties used as primary residences. This means that people who are in or nearing bankruptcy can qualify for standard loan modifications, including principal reductions.

Loan modification firms and bankruptcy mods

The new provision will naturally result in a surge of bankruptcy loan modification applications. Loan modification firms may take a while to integrate the changes into their programs. If you’re thinking of trying your luck, you may have a long wait ahead of you—although there are ways to speed up the process. A good solution is to work with a loan modification firm that’s up to date and offers bankruptcy assistance as well.

 

Earlier in Government:
New Rules for Home Loan Modification Begin June 1, 2010
Government Steps Up Loan Modification Anti-Fraud Efforts
Government Gears Up for Financial Literacy Month, Warns Against Scams

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