WASHINGTON — The Obama administration thinks that its Making Home Affordable plan will help 9 million homeowners refinance problem mortgages or modify them in order to avoid foreclosure. Who qualifies for help of what kind? Here are some answers.
Q: How do I know if I qualify?
A: Your mortgage must predate the start of 2009, you must live in the home and you’ll have to provide proof of income. Then ask two questions. First, are you already behind on payments or even in the foreclosure process? If the answer is no, then ask yourself whether your current mortgage rate is high enough to make it worth your while to refinance to take advantage of today’s low rates for 15-year and 30-year fixed-rate mortgages.
Q: That’s it?
A: No. If you think it’s advantageous to refinance, you must find out who owns your loan. Most mortgages are bundled together and sold into a secondary market, where investors technically own them. If Fannie Mae or Freddie Mac placed your loan into the secondary market, you can contact the company that sends your monthly mortgage statement to discuss the new program. If your mortgage is in the portion of the secondary market where the private sector issued the mortgage-backed securities, you don’t qualify.
Q: How do I know who owns my loan?
A: You’ll have to ask the company that sends your monthly statement. These companies are sure to be swamped with calls this week, so be patient. And be warned: Borrowers have found in the past that mortgage-bill collectors — called servicers — often are less than forthcoming with answers as to who owns the loans.
Q: What if my loan is owned by Fannie or Freddie but I have negative equity?
A: You’re not alone. Researcher First American CoreLogic reported Wednesday that one in five homeowners nationwide now owes more than his or her home is worth. To qualify under the refinance portion of the Obama plan, you can owe up to 5 percent more than your home is now worth. Thus, many homeowners in California, Florida, Arizona and Nevada, where home prices have plunged, won’t qualify.
Homeowners in 250 high-cost U.S. counties can seek help under either track, however, provided that they qualify, even if the mortgage is worth up to $729,750. This could help high-income homeowners in Middle America and the Northeast, where home prices haven’t fallen as much.
Q: What about those of us who are about to lose our homes?
A: A lot will depend on whether the mortgage bill collectors, the servicers, think that they have leeway from investors to modify the loans. They’re being offered an upfront fee of $1,000 and will get “pay for success” fees for three years if a borrower’s modified loan remains in good standing. They’re being offered even more fees if they get homeowners into this program before they fall behind on payments.
Q: What happens if the servicer agrees to modify my mortgage?
A: First, the servicer has to get your monthly payment down to 38 percent of your monthly after-tax income. It can do this by taking a loss on the loan or stretching a 30-year loan into a 40-year, for example. It’s allowed to reduce interest rates as low as 2 percent.
Once the 38 percent threshold is met, the government matches lenders dollar for dollar to get the payment even lower, to 31 percent of monthly after-tax income.
This percentage is calculated on the value of a first-lien mortgage. If a home carries a second lien — often called a second, or junior, lien — the servicer will get another $250 if it extinguishes the second mortgage.
Q: Is the modification a permanent fix?
A: The new interest rate would be valid for five years. Afterward, it can rise 1 percent a year until the lending rate hits the conforming loan survey rate at the time of the modification. Given that mortgage rates today are low by historical standards, the loan survey rate is likely to be well below the punishing adjustable rates that are at the heart of many distressed mortgages.
Q: Do lenders have to participate in Making Home Affordable?
A: If they’re getting Wall Street bailout money and hope to get any more, then they have to play ball. Many mortgage servicers are outside this realm, however, and their trade group, the American Securitization Forum, gave only lukewarm, qualified support to the Obama administration’s plan.
Q: Is there any way to force servicers to help homeowners?
A: The House of Representatives is expected to pass legislation this week that would allow bankruptcy judges to modify mortgages. This measure, which seems to have support in the Senate, too, would let judges shave off of mortgages the difference between what homeowners owe and what their homes are now worth. This would give homeowners some leverage in negotiations.
Q: But don’t these homeowners deserve what they get for overextending themselves?
A: Some think so. There are two parties to a bad deal, however — people who bought too much home and lenders who let their underwriting standards fail in lending to them. Somebody has to lose. The Obama administration is betting that keeping owners in their homes helps set a floor under prices. Critics think that only the marketplace can find a floor for home prices.