THE President announced his much-awaited HOME AFFORDABILITY & STABILITY PLAN last week. The objective of the plan is to bring mortgages in line with home values. What does this mean? It means that the plan recognizes that the values of houses have dropped so much that even those who have made big down payments to buy their houses have under water mortgages.
What does this mean? It means that many homeowners owe more on their houses than what they are currently worth. For example, the current fair market value of your house might be $400,000 but your mortgage on the house has a balance of $500,000. Thus, your house is "under water" for $100,000. Why should the government help the homeowner out? The current administration believes that homeowners who owe more than what they are worth might think that the house is not worth keeping and walk away from the mortgage because the house is technically worthless and because the mortgage loan balance is too big and not supported by any equity. The administration believes that there are two kinds of homeowners that have "underwater" loans. The first kind is those with good credit and has been paying their mortgages on time but want to refinance their home loans with lower rates. These homeowners cannot refinance even if they have good credit because their houses cannot qualify for refinancing with the current drop in market values.
For people with good credit but with houses that cannot qualify for refinancing, the plan proposes to allow loans to be made up to 105% of the property’s value. I am not sure how this will actually work out. But let’s consider some examples. If the house is worth $400,000 but the outstanding mortgage is $420,000, there is no question that a homeowner with good credit will be able to get a new loan to refinance their old mortgage of $420,000 because he is completely within guideline. What is good credit? I presume someone with at least 730 credit score would qualify. Maybe even someone with 700 credit score would qualify because normally 700 is a good score. But someone with a 680 score may not qualify. What if the balance of the loan was $500,000, will the homeowner with good credit qualify for a refinance loan of $420,000? It would seem so.
The purpose of the stability plan is to bring mortgages in line with home values. Thus, the homeowner with good credit would qualify form a refinance of $420,000. What happens to the difference between $420,000 and $500,000? The difference of $80,000 would have to be forgiven by the creditor. The administration estimates that there are between 7 million to 9 million in this category. Homeowners in this category will realize a reduction in mortgage payments attributable only to a reduction of interest rates, smaller loan because of reduction of balance of the loan to the current fair market value of the property, and maybe a longer-term loan. In this example, if the original loan is 6.5 % fixed for 15 years with a loan balance of $500,000, the new mortgage payment will be lower because the refinance loan will be $420,000, with $80,000 forgiven, and the interest rate will be between 4% to 5%, and fixed for 30 years. The combination of all these factors will result in a lower monthly payment. Fannie Mae and Freddie Mac will provide the refinance loan. However, the charters of Fannie Mae and Freddie Mac prohibit them from acquiring loans with loan to values in excess of 80% unless the homeowner has mortgage insurance. To circumvent this, the refinance will be called modifications.
What if your credit score is bad and you actually cannot afford your current mortgage payment and cannot sell your home, you are part of the Administration’s estimate of 4 million homeowners that it also plan to help out.
We will discuss the Administration’s plan for you in the next week’s article.
If you need debt relief, contact my office. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803. (Advertising Supplement)
( Published on March 20, 2009 in Asian Journal Los Angeles p. C4 )
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