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How the Homeowner Affordability and Stability Plan should work

 

How Does the President's Housing Program Work?

 
Here are some practical examples of how the Homeowner Affordability and Stability Initiative announced by President Obama on Feb. 18 is supposed to work. Final details will be made available on March 4, 2009.
 
 
Three examples:  How the Program is to Work for the Lender, Government and Borrower
 
Affordability Initiative: Family A: Access to Refinancing- Fannie Mae Conforming Loan
 
  • In 2006: Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20 percent down.) They received a Fannie Mae conforming loan with an interest rate of 6.50 percent.
  • Today: Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000.
    • Their “loan-to-value” ratio is now 90 percent, making them ineligible for a Fannie Mae refinancing.
  • Under the Refinancing Plan: Family A can refinance to a rate of 5.16 percent. This would reduce their annual payments by nearly $2,350.

 
Existing Mortgage
Refinancing
Balance
$199,584
$203,575
Remaining Years
27
30
Interest Rate
6.50 percent
5.16 percent
Monthly Payment
$1,308
$1,113
Savings
$196 per month, $2,347 per year

 
Affordability Initiative: Family B: Access to Refinancing- Fannie Mae Conforming Loan
 
  • In 2006: Family B took a 30-year fixed rate mortgage of $350,000 on a house worth $475,000 at the time. (The family put just over 26 percent down.) They received a Fannie Mae conforming loan with an interest rate of 6.50 percent.
  • Today: Family B has about $337,460 remaining on their mortgage but their home value has fallen to $400,000.
    • Their “loan-to-value” ratio is now 84 percent, making them ineligible for a Fannie Mae refinancing.
  • Under the Refinancing Plan: Family B can refinance to a rate of 5.16 percent. This would reduce their annual payments by nearly $4,000.

 
Existing Mortgage
Refinancing
Balance
$337,460
$344,210
Remaining Years
27
30
Interest Rate
6.50 percent
5.16 percent
Monthly Payment
$2,212
$1,882
Savings
$331 per month, $3,968 per year

 
Stability Initiative: Family C: Eligibility for Participation
 
  • In 2006: Family C took out a 30-year sub-prime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5 percent down). Their mortgage broker – Mom & Pop Mortgage – sold their loan to Investment Bank. The interest rate on their mortgage is 7.5 percent.
§ Today: Family C has $214,016 remaining on their mortgage but their home value has fallen -18 percent to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.
    • Their loan is now 113 percent the value of their home, making them “underwater” and unable to sell their house.
    • Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42 percent.
 
  • Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C's mortgage payment will adjust upward at a moderate, phased-in level.
 

 
Existing Mortgage
Loan Modification
Balance
$213,431
$213,431
Remaining Years
27
27
Interest Rate
7.50 percent
4.42 percent
Monthly Payment
$1,538
$1,132
Savings:
$406 per month, $4,870 per year

 
  • First, Investment Bank (working through a mortgage servicer) reduces the interest rate so that the Family C's monthly debt-to-income ratio drops from 42 percent to 38 percent. This means that Investment Bank must reduce the interest rate from 7.50 percent to 6.38 percent, bringing down Family C's monthly payment from $1,538 to $1,387.
  • Second, the government and Investment Bank share the cost of further reducing the interest rate so that the Family C's monthly debt-to-income level is lowered to 31 percent. Any dollar the bank spends is matched by the government. At this stage, Family C's interest rate is reduced from 6.41 percent to 4.43 percent. In total, Family C's monthly payment has fallen from $1,538 to $1,132.
  • If Family C remains current on their payments, they will receive incentive payments up to $1,000 a year, or $5,000 over five years, that would go towards reducing the principal they owe. Additionally, the mortgage servicer can earn an up-front incentive fee of $1,000, plus up to $1,000 per year in “Pay for Success” fees for three years, so long as Family C remains current.

 

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