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New mortgage plans won’t help everyone

At the time of this writing (Thursday afternoon) there is great speculation, rampant rumors and even a few urban legends floating about regarding the efforts of the Obama administration to stop the housing crisis.

Essentially what the government is planning to do (it appears) consists of a four-pronged attack. First, the government has announced it will invest $200 billion into the two companies that hold and raise most of the mortgage money in the U.S. (Fannie Mae and Freddie Mac).

This move will be to strengthen the companies’ balance sheets and enhance the appeal for investors to entrust Fannie and Freddie with their money. This will serve hopefully to increase the supply of cash for mortgage lending and to lower rates.

The second part of the attack is for the Treasury and Federal Reserve to aggressively purchase mortgage-backed securities, therefore adding even more money to the pipeline and hopefully lowering mortgage rates.

The third prong of attack is to set up a program to subsidize modifications of mortgages for owner-occupied loans under $417,000. To modify a mortgage means the original rate and terms of the loan are changed to lower the customer’s payment so he can better afford his home. This is different from a refinance, which entails a whole new loan.

The modification issue is a complicated one, and I can assure you there will be a great deal of confusion and angst as this is worked out and interminable delays that will mimic lines of shoppers waiting to buy a loaf of bread in the old days in Russia. Presently, different lenders have different modification programs available. It appears the government would share the cost of modifying a loan by reimbursing the lender for part the lost interest from modifying the loan.

Currently some lenders require a borrower to be 30 to 90 days delinquent to qualify for consideration. Other lenders do not require this, and only ask the borrower demonstrate his financial situation has deteriorated significantly. Most lenders do require the borrower show an ability to make a reduced payment at least. If the borrower has little income then it may be impossible to work anything out. The proposed guidelines would not require borrowers to be late on their payments, offering relief to those who are trying to do the right thing and pay their loans but are struggling.

Also, it appears that borrowers who owe up to 5 percent more than the worth of their house would be able to refinance to a lower rate and possibly an interest reduction. However if you owe 106 percent or more of the house’s value, you might be out of luck.

Currently, lenders are backlogged for months in rendering decisions on loan modifications. I know of one local resident that has been working on getting his loan modified with Washington Mutual for over five months and still cannot get an answer.

A major concern of mine is once the modification programs are open to all, how will the lenders even begin to process the flood of applicants? We may see banks besieged with thousands of requests a day and only able to process dozens a day. I wonder if the Obama administration has considered the public backlash of homeowners waiting for months for an answer.

The fourth plan is to establish a streamline refinance program to allow those who may not qualify for a loan modification to at least refinance into a lower rate loan. Streamline refis have been used for many years by FHA and VA programs and work well. Key to these is that the borrower doesn’t have to get an appraisal, although they do have to show income.

One of the huge problems right now is many people may be caught in between and make a bit too much money to qualify for a modification and too little to qualify for a streamline.

Given this is a government fix, don’t get your hopes up too high.

Chris Neuswanger is a loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related inquiries from readers.


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