Mandy: How the Homeowner Bailout Impacts You

Source: Jeff Turner

One short day after signing the $787 billion economic stimulus plan on Tuesday, the Obama administration announced a $275 billion “Homeowner Affordability and Stability Plan (HASP)”. The executive summary, presented by Obama in Phoenix, AZ, highlights the three major problems that homeowners face today:

1. Inability to Re-Finance

Responsible homeowners have seen their property values fall and due to a weak credit market they are unable to re-finance at a lower interest rate. In Obama’s remarks, he stated that since 2006, home values have dropped an average of 25% nation-wide. This means that you could have done everything ‘right’, yet still be 25% or more in the hole in home equity.

2. Unemployment Leading to Increased Foreclosure Risk

Millions have lost their jobs and as many as 6 million more families are at risk of foreclosure, according to the Obama administration. To be exact, 2.6 million people lost their jobs in 2008, and an additional 598,000 lost their jobs in January of this year. Many of those who have not been able to claim a new job are now struggling to meeting their mortgage payments.

3. The Snowball Effect of Foreclosures

Foreclosures are hurting neighborhoods through a decline in property values. The administration estimates that with each foreclosed home, nearby properties drop as much as 9% in value. This contributes further to those doing everything right being deeper in the hole in terms of equity.

To address these 3 issues, Obama’s executive summary highlights a 3-part solution:

1. Affordability

Provide low-cost re-financing to 4 to 5 million responsible homeowners who have loans that are currently guaranteed by Freddie Mac or Fannie Mae. Allowing these homeowners to refinance would lower their monthly payments. The following example was given in the summary:

“Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 - making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% - reducing their annual payments by over $2,300.”

2. Stability

This would involve creating a $75 billion “Homeowner Stability Initiative” to help 3 to 4 million struggling homeowners who commit to make reasonable monthly mortgage payments. Details include:
- Incentives to reduce the borrower’s monthly mortgage payment to 38% of his or her income
- Providing $1,000 payments to borrowers that stay current on their loan, up to five years
- Providing “pay for success” incentives to mortgage providers for conforming loan modifications
- Creation of an insurance fund up to $10 billion to discourage lenders from foreclosing on borrowers
- Allowing judicial modifications for borrowers that are out of options
- Providing $1.5 Billion in relocation and other assistance to those displaced by foreclosure and $2 Billion in Neighborhood Stabilization Funds

3. Confidence in the Mortgage Market

This would come through supporting low mortgage by doubling the preferred stock back-stop funding for Fannie Mae and Freddie Mac to $200 billion each (from $100 billion), and continuing the purchase of mortgage-backed securities issued by them to promote market liquidity.

For further details, the White House Blog has released an extensive Q and A on the HASP.

How does HASP Effect you?

If you’re a homeowner, what does this plan do for you?

Are you confident that it will help you?

What else needs to be done in order to secure your confidence in the housing market?

For more of GE Miller’s writing, visit 20somethingfinance.com