By: NICK TIMIRAOS | Wall Street Journal
New rules issued by the White House on Wednesday clarify who can take advantage of the latest round of federal efforts to head off foreclosure. President Barack Obama announced his housing stability plan two weeks ago, promising the most far-reaching effort yet by the government to help large numbers of at-risk borrowers.
See how new measures will affect some homeowners across the country.
The program has two main components. One provision will allow diligent borrowers who are current on their mortgage payments but have little or no equity in their homes to refinance their first mortgage to take advantage of current interest rates, which have fallen to near record lows. That is designed to allow responsible borrowers -- mainly those who have been hurt by falling home prices -- to benefit from the current climate. Lenders won't refinance borrowers who don't have equity in their homes.
The second component involves modifying mortgages loans to lower monthly payments to 31% of the borrowers' gross monthly income, mainly by reducing the interest rate on the loan. This effort would target borrowers who are falling behind on their mortgage payments or who are in danger of falling behind. The government will provide financial incentives to lenders and mortgage servicing companies to encourage them to offer the reduced payment plans, which last for five years.
But as with any broad effort, homeowners are treated unevenly in the programs. The refinance provision is open only to borrowers who have loans that are owned by Fannie Mae or Freddie Mac. That excludes large numbers of borrowers with subprime and other exotic mortgages sold to investors; and borrowers with so-called "jumbo" loans that are too large for government backing. Those groups will be eligible for the modification part of the plan, but only for loans up to $729,750.
Borrowers who owe more than 105% of the current value of their home also won't be eligible for refinancing. That means that fewer borrowers in the nation's most over-heated housing markets, including California and Florida, and in some of the most depressed market in the Midwest can take advantage of the program. "Most of the people we serve are too far underwater to take advantage of this," says Dan Elsea, a mortgage broker in Detroit.
Nationally, 25% of mortgage holders have conforming loans that are within the 80% to 105% loan-to-value ratio needed to qualify for the program, according to real estate Web site Zillow.com. But that number falls in certain high-cost housing markets that have seen big price declines. In Los Angeles, for example, just 9% of mortgage holders are eligible to refinance, while 8% of conforming borrowers are too far underwater, according to Zillow.com.
Here's a look at some homeowners across the country who may benefit -- and who won't -- from the plan:
PROBLEM: Wants to refinance and is current on his mortgage, but doesn't have equity in this home.
Mike and Joy Gallante qualify to refinance because Fannie Mae holds their mortgage.
Mike Gallante has watched the value of his five-bedroom home in Glendale, Ariz., fall to $400,000 from $530,000 two years ago. The decline has left him with no equity. The 45-year-old father of three believes he could save around $525 on his monthly payments if he could refinance his fixed-rate mortgage from the current 6.5% rate to 4.75%, which would provide $180,000 in savings over the 30-year term of the loan. "Why should I have to stay with my 6.5% interest rate when everyone else is getting bailed out?" he says.
Mr. Gallante, who works in law enforcement, says the government should reward people who haven't done anything wrong but can't take advantage of unusually low interest rates because home prices have fallen. "I'm one of the guys that, we work hard, but would like to have some sort of benefit for being a good customer," says Mr. Gallante, who set up automatic payments and says he would never consider missing a mortgage payment. "I feel a little bit betrayed because I'm never late," he says.
RESULT: His loan is owned by Fannie Mae, so he qualifies to be refinanced into a lower-interest-rate mortgage.
PROBLEM: Fell behind on adjustable-rate mortgage after reset sent payments higher. She wants to reduce her monthly mortgage payments.
The Price family may get a modification if the lender plays ball.
Nelia Price stopped making mortgage payments in December, after struggling for months to make payments on her option adjustable-rate mortgage. The monthly payments on the $420,000 mortgage began at less than $2,000 and gradually increased to $3,000. She hopes that by missing her payments, her bank will modify her loan. The value of her four-bedroom home in Modesto, Calif., has declined to around $250,000 since 2005 when she paid $465,000.
Ms. Price, a 50-year old real-estate agent and single mother, was able to enter a one-year loan modification in August 2007 that set her monthly payment at a fixed-rate. But her bank wouldn't extend the modification when it expired last summer. "They said they couldn't help me because I was current on my payments," she says. "I told them, 'That's ridiculous. I don't want to ruin my credit score.'"
While Ms. Price could be eligible for a government-subsidized loan modification, which is targeted to borrowers who received exotic loans with teaser rates, that provision would last for only five years and relies on the voluntary participation of her lender and servicer. Under that program, the government would share the cost of reducing monthly mortgage payments to 31% of a borrowers' income if the first mortgage holder reduces the loan to 38%. That would require her bank to sharply reduce the mortgage payment, because her mortgage payment has grown to $3,000 while her monthly income has fallen to around $4,000, around half of what it was two years ago. "It'd be nice to get the help," says Ms. Price, "but I'm not sure what Obama can do about this."
RESULT: She's eligible for a loan modification, but whether she receives one will depend upon her lender's willingness to participate. If the lender goes along, her monthly payments could fall to about $1,300 a month for five years.
PROBLEM: Wants to refinance but his "jumbo" mortgage exceeds the limits of the government program.
The McKinneys aren't eligible for help because they have a jumbo loan.
Michael McKinney can't refinance the loan on his $1 million five-bedroom home in Phoenix, Md., north of Baltimore. Even though he put 30% down when he bought the home in October 2007, the value has fallen $130,000, leaving him with less equity than what most lenders require to refinance a jumbo loan these days.
Mr. McKinney says he has an excellent credit rating, has never missed a mortgage payment even though the $4,400 payment accounts for half of his monthly income. He's like to take advantage of lower rates to reduce his payments, but isn't eligible. "People like me are being cut out of the process. There's an entire part of the market that's being ignored," he says.
Mr. McKinney, who has four young children, says that while it's one thing to exclude borrowers with multi-million dollar homes, he disputes the idea that all jumbo borrowers are millionaires that don't deserve help. "Why are people in some parts of the country being penalized by a…limit that doesn't reflect reality in many areas?" he says.
RESULT: He won't qualify to refinance under the housing stability plan because he took out a so-called "jumbo" loan that is too large to qualify for backing from Fannie Mae or Freddie Mac. He might be eligible for a loan modification, but he'd have to show that he's in danger of default.
PROBLEM: Can't make payments after her income declined and wants a loan modification.
Nicole Cook, 29, is worried that her bank will foreclose later this year. In 2005, she purchased a new four-bedroom home in McDonough, Ga., an Atlanta suburb, for $236,000 with a fixed-rate mortgage at 7.5%. She began missing payments after a job change last year reduced her income by $40,000. She says her monthly income of $4,100 isn't enough to cover her monthly mortgage payments, which total $2,360, or around 57% of her income.
Ms. Cook, a single mother of three who works in telecommunications, has asked her mortgage servicing company for a loan modification, but they've denied her request because her income isn't high enough. The government initiative is designed to give servicers a greater financial incentive to modify that loan by paying the company $1,000 for each modification and then annual payments of $1,000 for three years if the borrower remains current. Ms. Cook could also receive a $1,000 subsidy annually for five years that would be applied towards the loan principal.
RESULT: If her lender decides to participate in the government-subsidized loan modification, she could get help. She's ineligible to refinance, even though Fannie Mae owns her loan, because she has missed mortgage payments and because she owes more than 105% of the value of her home, which she estimates has fallen to around $200,000.
PROBLEM: Wants to refinance; already had a loan modification
Andrea Davison had the loan on her DeWitt, Iowa, home modified by her mortgage holders last year. Her mortgage holders replaced two loans that adjusted to higher payments with a single 9% fixed-rate mortgage of $105,000. Her bank earlier this year agreed to lower her interest rate to 5.25% for six months, which she says will save her $260 each month. "My gosh, we're thankful. It could go a long ways to get us back on our feet," she says.
Ms. Davison, a 38-year-old corporate travel agent, was on the brink of foreclosure last year until her second mortgage holder agreed to forgive the $43,000 that she owed on two loans worth $150,000. She and her husband had taken out an adjustable-rate mortgage in 2007 that was resetting her monthly payments to $2,300 from $900 over the span of a few months. They had tried unsuccessfully to sell their house for 10 months, all while emptying their savings and retirement accounts to stay current on their loans.
While the loan modification staved off foreclosure, she says that the monthly payments on her new loan, which total $1,100, leave them with nothing to rebuild their savings. "If something happens, we have no credit cards. We have no savings. We have nothing," she says.
RESULT: She could be eligible to refinance if her loan is owned by Fannie Mae or Freddie Mac. But living in a small town with few home sales, it will be difficult to determine how much her home is worth. If it's below $100,000, that would put her below the 105% loan-to-value ratio that's required. Modest price declines on less expensive homes can leave borrowers with negative equity much faster than on more expensive homes.
PROBLEM: Wants to refinance but his loan isn't owned by Fannie Mae or Freddie Mac.
Jeff Hall of Gilbert, Ariz. wants to refinance his $422,000 "interest only" mortgage before the payment jumps sharply when the principal is due in three years. Currently, he's not in danger of default but worries that if he will miss the chance to lock in a low fixed-rate if he doesn't refinance now.
Mr. Hall paid $470,000 for the house and added around $80,000 in upgrades, including landscaping and a swimming pool. Although he still has equity in the home, Mr. Hall's problem is that his loan is above the $417,000 conforming limits for Gilbert, which means the loan couldn't have been touched by Fannie Mae or Freddie Mac.
RESULT: He's not eligible for help under this plan. To refinance, he'll have to put an additional $45,000 into his home, which would give him 20% equity in his home and a loan that is below the conforming level. Mr. Hall has considered doing just that, but he's worried that he'll just lose that money if the home continues to decline in value. "How much more do we really want to sink into our house?" he says.