Foreclosure help another first step

Fannie Mae and Freddie Mac have a new plan out to help homeowners facing foreclosure.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans' principal may be deferred, though not reduced.

Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

This plan differs from the housing bill passed in August. The original plan allowed borrowers to refinance into a FHA 30 year loan at 90% of the current appraised value of the home. This required that the current lender agree to write down the loan, which is at their sole discretion. Even though it was in the best interest of the current lender (they would likely lose more money by going forward with foreclosure), very few loans were modified.

This new plan removes the stipulation that the current lender agree to the modification, but also does not write down the principal amount of the loan.

In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.

"Loan modifications are not a gift ... the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment," said Brian Montgomery, commissioner of the Federal Housing Administration. "This is not loan forgiveness."

Another major issue in this loan modification is that it does not address a majority of the loans likely in or headed to foreclosure - subprime loans.

Though Fannie and Freddie own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.

This plan is an important first step, and hopefully its success will encourage private lenders to follow suit. As always there are no simple fixes to complicated problems, and it will take some time to dig our way out of the mess we have created, but this is an encouraging step.

Full article.

The mortgage market likes Obama

Using the same 30 year fixed loan with a 20% down payment that I have used in previous posts, the rate is now back down to about 6.125% when it was 6.625% just yesterday. What a difference a day makes.