Foreclosure Crisis: Gov’t Response, Decoded

By Alexandra Andrews

By now, you’ve probably heard about the Obama administration’s Making Home Affordable plan – the government’s most aggressive and wide-ranging attempt yet to stem the nationwide scourge of foreclosures. We’ll be tracking some homeowners as they make their way through the program, so we thought we’d lay out the plan in detail first.

We also wondered what was happening to the government’s other foreclosure-prevention efforts. Are borrowers still using them? FHA’s $300 billion Hope for Homeowners program isn’t seeing much action (so far, only a single homeowner has refinanced through the program), but some homeowners are finding relief through programs run by various government agencies, like the Department of Veterans Affairs.

Making Home Affordable
First, let’s take a look at the administration’s plan, which is split into two branches: a loan refinancing program for borrowers who are up-to-date on their payments and a loan modification program for those who are close to losing their homes.

Typically, if you wanted to refinance your mortgage to take advantage of lower interest rates, you’d need home equity of at least 20 percent. But plummeting home values have diminished the home equity of many borrowers.

Obama’s refinancing plan aims to help borrowers who now owe close to what their houses are worth and might not otherwise qualify for refinancing. It will not, however, help people who owe drastically more than their houses are worth: The amount owed must be between 80 percent and 105 percent of the house’s value. But to be eligible for this program, the loan must be owned or guaranteed by Fannie Mae or Freddie Mac. In addition, the borrower must live in the home and have a solid payment history and enough income to support the new payments.

A refinance won’t actually reduce the amount the borrower still owes on the loan (the principal); instead, a new loan with lower interest rates will replace the old loan.

Meanwhile, the other branch of the administration’s plan, the loan modification program, will help borrowers who aren’t simply looking to take advantage of lower interest rates; they’re scrambling to keep their homes. Borrowers in this program have either defaulted on their loans or can prove that they’re about to.

The loan modification program is available to borrowers even if their mortgages aren’t owned or guaranteed by Fannie or Freddie, as long as their loan servicers have signed up to participate. (Many of the biggest ones already have: here’s the full list.) The borrower can also have a rockier credit history, and it doesn’t matter how much the value of the home has fallen. And second mortgages are eligible for a loan modification under this program as well.