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Obama Housing Stimulus Plan: Winners & Losers - 2009-03-08
Last week, we looked at the president’s “Housing Affordability and Stability Plan”, and saw that it is largely directed at two groups of existing homeowners:

* Households in which the borrower is either slightly behind on their home loan or are at some stage in the foreclosure process (about 4 million owners), and

* Homeowners who have never missed a payment, but are struggling to make ends meet, and may not be able to hold on much longer (another 4 to 5 million owners).

The plan uses a broad brush to help as many homeowners as possible stay in their homes. This solution brings with it a double benefit.

First, it has the effect of slowing the flood of foreclosures that are threatening the stability of our financial system. A refinanced or modified loan is a less threatening commodity than some 5 to 9 million borrowers who may be near the end of their financial ropes.

Second, it helps stabilize home values in America’s neighborhoods. Home prices can not begin to recover until the huge glut of empty houses is absorbed and returned to service as clean, decent housing.

By keeping a family in their home, we experience one less vacant house that might have been vandalized and become a roadblock to a housing recovery.

As I have met with homeowners this past week, here are some of the questions I have been asked about the plan:

Q: Who are the big winners under the president’s plan?

A: I’m not sure we can identify an actual winner, but anytime a homeowner is able to stay in their home as opposed to losing ownership and being forced to move, the homeowner wins.

The first group of winners are struggling owners who have acted responsibly and kept their payments up. They will now be allowed to refinance at lower interest rates, even though their property values may have fallen.

The second group of winners are those who are suffering under adjustable or exotic loan programs that consume 40 or even 50 percent of monthly income. They can now apply to have their loans modified so that the new payments are affordable, at least for a period of up to 5 years.

Q: Are there any losers under this proposal?

A: While the program seeks to help many households, it does not reach every homeowner.

Persons who have already lost their homes to foreclosure will see no benefit. Also, there will be minimum qualifying guidelines for both the refinancing and the loan modification programs. If your income has dropped so severely that neither of these programs can provide affordability, you will see no benefit.

Q: How do you measure affordability?

A: Many borrowers are saddled with subprime and exotic loan programs that are now consuming as much as half the borrower’s gross monthly income. Under the modification program, that borrower might see their monthly housing expense drop to as little as 31 percent of monthly income. Experience has shown that a housing expense ratio of one-third monthly income is usually sustainable.

Q: Who would pay for that modification?

A: To the extent that the payment drop would lower the housing expense from its current level to 38 percent of income, the lender would bear the cost. Then, to lower the cost of the monthly payment to 31 percent of income, both the government and the lender would share the cost. This modification would last for up to 5 years.

Q: What will happen after five years?

A: At the end of the modification, the lender will be able to gradually adjust the interest rate upward on an annual basis until it reaches the conforming loan rate in place at the time of the original modification. Because many borrowers will likely apply for this program in the near future, their modified rates will reflect today’s historically low rates.

Q: Why would my lender agree to participate in this program?

A: Because taking a home back after a foreclosure in an extremely expensive proposition. Unless you have a substantial amount of equity in your home, it is unlikely that the lender would be able to sell it for enough to cover all their costs. If they can avoid the foreclosure in the first place, they save a lot of money.

Q: What will happen to those who are not approved for modification?

A: This program is not designed to allow a homeowner to stay in a house they will not be able to afford. If a borrower does not meet the guidelines for a sustainable modification, they will not benefit from this program. However, other programs may offer assistance.

Q: If I am a homeowner struggling to make my payments, what should I do?

A: Call your lender at the number on your payment coupon, and ask if your loan will be part of the president’s housing plan. Not all loans are eligible, and in addition, lenders must agree to participate. However, many major lenders have already indicated a willingness to be involved.

Q: If my loan doesn’t qualify for this program and I still need help, what should I do?

A: At the earliest sign of financial stress, I recommend you contact Consumer Credit Counseling Service of Atlanta at 1-800-251-2227. They offer excellent counseling for homeowners facing foreclosure as well as other financial challenges.

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