Obama housing rescue could help millions

Rules for the Obama mortgage rescue plan were released today. The plan focuses on two distinct groups of borrowers. The first group is made up of borrowers who are delinquent and who want to modify their loans so they'll be more affordable. To qualify for loan modification help, you must have lost your job, suffered a pay cut or face higher mortgage payments. To get help, you will need to meet the strict financial hardship guidelines of Fannie Mae or Freddie Mac.

The second group of people who will be helped consists of those seeking to refinance mortgages even though the equity in their home is lost. This group will be able to refinance even if they need to borrow as much as 105% of their home's current market value. Prior to the rescue with current tight lending conditions, people wanting to refinance could only do so if they had 20% of equity in their home and could borrow a maximum of 80% of the loan value. This rescue will help these people get out of higher interest rate mortgages. Refinancers will not have to meet the strict hardship guidelines.

Modification applicants will face the stricter rules. They must fully document their income with pay stubs and tax returns and sign an affidavit attesting to "financial hardship." Help will be provided only to people living in their homes and with an unpaid principal balance of up to $729,750. Also, you will need to go for counseling if your total household debt -- including auto loans, credit cards and alimony -- totals more than 55% of your income.

"This plan will help make home ownership more affordable for 9 million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans," Treasury Secretary Timothy Geithner said in a statement released with the plan details. Your loan must be originated before Jan. 1, 2009 to qualify for modification. Modification will go through 2012.

Hardship guidelines require people to prove they experienced a decrease in income or an increase in expenses that caused the delinquency. In other words, those who simply bought more house than they could afford would not qualify for loan modification.

The plan is divided into two parts. About four million people who are at risk of losing a home to foreclosure can seek modification of their loan terms to lower their payment. These folks will be subject to the strict hardship guidelines of Fannie Mae and Freddie Mac. Another five million people can refinance loans if they owe more than their homes are worth.

Currently Fannie Mae and Freddie Mac, which were seized by the government in September, own or guarantee $5.2 trillion of the $12 trillion residential home loan market. After the Obama loan program is completed, the market will be more strongly tilted toward government ownership or loan guarantee as loans owned in the private marketplace shift to government ownership or guarantee.

Sheila Bair, Chairman of the FDIC, said in a speech yesterday about the modification program, "Servicers are ready for it. Even some of the investors are starting to soften up." Servicers will be paid $500 for each loan they modify and as much as $1,000 for three years after modification when the borrower stays current. Loan holders will get a $1,500 incentive for modifying loans for borrowers at risk. Borrowers who stay current in their modified loans for five years will get a $1,000 incentive per year toward their loan principal.

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask to Avoid Foreclosure."
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