Thursday, February 19, 2009

Obama's mortgage relief not designed for high cost areas

Struggling homeowners in California and other high cost housing markets will benefit less from the Obama administration's "Homeowner Affordability and Stability Plan" than those in lower cost housing markets.

by Broderick Perkins
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Deadline Newsroom - Struggling homeowners in California and other high cost housing markets will benefit less from the Obama administration's "Homeowner Affordability and Stability Plan" than those in lower cost housing markets.

The $275 Billion Plan, with a March 4 rollout, includes a refinancing program for "responsible" borrowers who haven't missed payments and whose loans are larger than the value of their homes, and a loan modification provision with incentives for lenders to modify certain mortgages.

Many Californians and others in high cost areas may not see much immediate relief but federal aid earmarked for those areas could follow.


Under the refinancing provision, homeowners with less than 20 percent equity in their homes, who now find it difficult if not impossible to refinance, will be able to get new loans at lower interest rates provided the new note doesn't exceed 105 percent of the home's value.

A refinanced mortgage replaces the old loan with a new one. The plan targets 4 to 5 million homeowners.

For high cost areas, the problem with the refinancing provision is that it only applies to mortgages held by Fannie Mae and Freddie Mac.

During boom times Fannie Mae and Freddie Mac loans were only up to a maximum of about $417,000. The limit was temporarily raised to $729,750 in 2008, when fewer people were buying. This year the limit went back to $625,000, until the latest federal economic stimulus package (American Recovery and Reinvestment Act) Obama signed put it back at $729,750, at least for 2009.

An estimated 60 percent of the home loans made in the state in 2006 and 2007 were larger than Fannie and Freddie loan limits. During 2008 about 33 percent of home loans were above those so-called "conforming" levels, according to the California Association of Realtors.

"When I saw 'Fannie Mae and Freddie Mac' I said his (President Obama's) team needs to come to Silicon Valley," said Quincy Virgilio, president of the Santa Clara County Association of Realtors.

"This isn't going to help many people here," he added.

Virgilio said the bulk of California's home-owning population lives in major metropolitan areas where housing costs are high.

Loan modification

The loan modification part of the plan targets 3 to 4 million "at-risk" homeowners, those with a high mortgage debt-to-income ratio and those with mortgages larger than the value of their home and "under water."


A loan modification, unlike a refinance, changes the terms of the existing loan without writing a new one.

Also called a "workout," this provision is open to anyone including those who haven't missed payments, but may be at risk of missing payments. A modification is designed to get payments down to 31 percent of the homeowner's income. That could be accomplished by a reduction in the interest rates or principal, or an extension of the term of the loan, or perhaps a combination.

The modification plan is open to anyone with any loan that has a balance under Fannie Mae and Freddie Mac limits, which now as high as $729,750.

The modification program, also designed to standardize a hodge-podge of modification efforts by lenders, also comes with incentives for both homeowners and lenders.

Loan services get up to $4,000 for modifying mortgages and borrowers got a principal reduction of up to $5,000 over five years for paying on time.

Credit market boost

Obama's plan also calls for an infusion of $200 billion into the government-owned Fannie Mae and Freddie Mac. The bundle should help lower interest rates and spur more borrowing.

Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California-Berkeley and the Rosen Consulting Group, told the San Jose Mercury News more relief could come to high-cost areas.

Rosen told the Mercury News, "I think this is the first tranche in a series of things that are going to happen. Until we see the details we won't know."

The Obama administration's plan is being funded by the existing Housing and Economic Recovery Act (HERA).

It also seeks to change bankruptcy rules to allow judicial mortgage modifications to reduce mortgage balances to fair market value provided the borrower sticks to a court-ordered payment plan.

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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group -- DeadlineNews.Com, a real estate news and consulting service and Web site and the Deadline Newsroom, DeadlineNews.Com's news back shop. Perkins is also a National Real Estate Examiner. All the news that really hits home from three locations -- that's location, location, location!

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