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Reaction is mixed to President Obama's plan to prevent up to 4 million homeowners whose mortgages are underwater from defaulting on their loans over the next three years.
Under the new plan, unveiled Friday, March 26, banks will be asked to lower the principal loan balance for certain homeowners whose mortgages exceed the value of their homes. The loans would be refinanced as mortgages insured by the Federal Housing Administration (FHA), fully backed by the government. In the past, loan modifications under the $50 billion federal Home Modification Program (HAMP) involved primarily reducing interest rates or lengthening the term of the mortgage, and most did not entail a government guarantee.
Also, up to $14 billion of TARP funds will be used to provide subsidies to lenders and loan servicers who agree to write down at least 10% of a first mortgage; the combined value of first and second mortgages can be no greater than 115% of the current value of the home. The new monthly payment cannot exceed 31% of the homeowner's income. Investors in the loans would clearly take the up-front hit, but the risk of future default on the modified loan would be transferred to the government.
The FHA part of the program has tight restrictions: homeowners must be current on their mortgage payments, live in the home, have a FICO score of at least 500 and qualify for a standard FHA-backed loan once the principal is reduced. Those who get a modified loan must make full monthly payments for three years for the principal to be reduced permanently. The high standards for these loan modifications suggest that the Administration hopes to head off another wave of loan defaults and foreclosures by providing help earlier in the process.
The Administration also announced an initiative to help unemployed homeowners, in which their monthly mortgage payments would be reduced or eliminated for three to six months while they look for work.
The latest initiatives are aimed at slowing the steady stream of homes that are headed toward foreclosure. The number of households receiving foreclosure filings, which includes default notices, auction-sale letters and bank repossessions, was 2.8 million in 2009, up from 2.3 million in 2008, according to Rick Sharga, vice president of marketing for RealtyTrac. He expects filings to increase to 3 million this year.
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