By Dawn Kopecki and Robert Schmidt
March 4 (Bloomberg) -- The Obama administration set loan modification guidelines for its $75 billion homeowner rescue plan, agreeing to pay lenders for altering troubled mortgages while reducing borrowers' interest rates to as low as 2 percent.
The voluntary initiative, announced on Feb. 18, would require applicants to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to "financial hardship," according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.
"This is not going to save every person's home," presidential Press Secretary Robert Gibbs said during a briefing. The plan offers help "for those who have played by the rules."
President Barack Obama's initial proposal, the biggest federal foray into real estate since the Great Depression, ignited criticism from Republican lawmakers that the government would end up subsidizing homeowners who are financially capable of surviving the economic slump on their own.
"Banks across the country will be inundated with phone calls asking how do I get a 2 percent mortgage, because 100 percent of homeowners will feel they are due now this largess from the federal government," said Representative Scott Garrett, a New Jersey Republican. He said the plan rewards "bad behavior" and exposes taxpayers to higher risk by imposing too many policy demands on Fannie and Freddie.
Lenders likely won't be able to offer the loan modifications for a few weeks as they update their technology to process the applications, a mortgage-industry official said on a conference call today with Obama administration officials.
Costs to Borrowers
Obama is seeking to curb a jump in foreclosures that, along with a drop in consumer credit, is lowering property values, dragging down the economy and keeping prospective homebuyers away. The housing market lost $3.3 trillion in value last year, and almost one in six owners with mortgages owed more than their homes were worth, according to a report last month by Zillow.com.
"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.
The Obama plan has two main parts: helping 3 million to 4 million homeowners who are at risk of foreclosure to lower their monthly payments by modifying loan terms; and using Fannie and Freddie to refinance the loans of 4 million to 5 million Americans who owe more than their homes are worth.
Loan Modification
Borrowers in the first part of the program won't be charged to modify their loans, while homeowners refinancing through Fannie and Freddie would be responsible for some costs, a Federal Housing Finance Agency official said during a conference call with administration officials today.
For a loan modification, lenders would have to reduce the mortgage payments to no more than 38 percent of the borrower's income. Then, the Treasury would share the cost for lenders to cut that debt-to-income ratio to 31 percent, the government said.
The modifications would allow a lender to drop the interest rate to as little as 2 percent to achieve the ratio, and if necessary, extend the term or amortization of the loan to as long as 40 years. If more effort is needed, lenders can forbear the principal and in some cases forgive, or reduce, portions of the principal altogether, the documents show.
Lenders that participate in the program for a single loan would be required to modify all of their other loans that qualify for the program, not just the worst performers, unless explicitly prohibited by contract, a Treasury official said during the call.
Secondary Lien
Home-equity loans and lines of credit, or secondary liens, would be excluded from calculating a borrower's loan-to-income ratio, officials from the Treasury and White House said in the call. The administration is working on providing partial payments to second-lien holders to encourage them to extinguish that debt, officials said. Those guidelines will be released in a few weeks, they said.
"By providing servicers and holders of eligible residential mortgages with incentives to modify loans at risk of foreclosure, the program will promote sustainable alternatives," the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and National Credit Union Administration said in a joint statement.
Borrowers with loans originated before Jan. 1, 2009, will be eligible for the program, which runs through 2012. People living in their homes who have an unpaid principal balance of as much as $729,750 can participate.
Fannie, Freddie
Fannie and Freddie, the mortgage-finance companies seized by regulators in September after their losses threatened to further disrupt the housing market, own or guarantee about $5.2 trillion of the $12 trillion residential home loan market.
The companies will offer, through their servicers, loan modifications and refinanced mortgages as well as help administering the broader loan modification program for Treasury.
Garrett, the ranking Republican on a panel that oversees the companies, challenged FHFA Director James Lockhart in a letter today on whether the administration's policy allowing Fannie and Freddie to refinance loans without new appraisals or additional mortgage insurance violates federal charters.
The proposal, Garrett said, may violate requirements that homeowners put up at least 20 percent of the appraised value of a home or carry mortgage insurance.
"Due to falling home values, many of the potential applicants for Treasury's foreclosure mitigation refinancing plan will now find themselves" below that level, Garrett said. "There is no specific language under this title that provides the regulator of these two entities any discretion for when or how to apply this requirement."
To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.
Last Updated: March 4, 2009 14:14 EST
Thursday, March 5, 2009
For Homeowners, Time to Be Cautious but Proactive
By Marcela Sanchez
Special to washingtonpost.com
Friday, October 10, 2008; 12:00 AM
WASHINGTON -- There is something surreal about listening to a 35-year-old New York financial adviser describe his inability to put his own financial house in order.
"I am a finance guy with an ability to talk to people," he said, asking not to be identified for fear that it would hurt his reputation and that of his company. The self-described "Wall Streeter," who made more than a quarter-million dollars in 2006, owns a home in the Hamptons. As business faltered and his income plummeted, he tried to refinance to save his property. But when he went to the banks, "I got nothing."
Tracey Packer, a chief credit officer for a financial services company in Oregon, also sought help from the banks when she lost her job. Earning $135,000 a year plus bonuses, she bought a 2,600-square-foot house for her and her two children -- a purchase she could easily afford.
But when her company folded and she could only find temporary work, she couldn't make the payments. "The bank didn't give me any option," she said, and in January the house foreclosed. Recently the bank sold it for tens of thousands of dollars less than Packer paid, and now she waits to learn how much she owes on a house she no longer owns.
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If the New York financial adviser had not turned to a mortgage modification agency for help, he could very well be where Packer is today -- out of his house. Instead, the agency, Amerimod, helped him slash the interest rate on his second mortgage from 11 percent to 7 percent, eliminate penalties and even reduce some of the principal. He is now waiting to hear about modified terms on his first mortgage.
Agencies such as Amerimod have leverage where individuals don't. They can present banks with several mortgages needing modification at one time. Often staffed by former real estate agents and mortgage brokers, these agencies know the system better than most individuals and have established relations with the banks.
However, some consumer advocates warn that these agencies proliferating at a time of crisis -- including those that present themselves as nonprofits -- are untested and could be a source of more consumer abuse. They are concerned that even as the federal government takes unprecedented steps to curb the excesses that led to the current financial crisis, some of the same individuals who were engaged in unsavory lending practices may now be moving to this new arena.
Aracely Panameno, director of Latino affairs at the Center for Responsible Lending, says that "caution" is crucial in this crisis, which her center estimates will extend until 2012 and put more than 6 million people at risk of losing their homes.
Panameno acknowledges that she is turning to some of the new nonprofits for assistance with her workshops such as "Mi Casa es Mi Casa Foreclosure Avoidance and Legal Clinic," to be held later this month in Prince William County, Va., where house values have dropped as much as 50 percent over the last two years. She believes that those who so successfully sold homes during the housing boom will use the same skills to advocate on behalf of borrowers facing foreclosure.
While recent government intervention should make banks more willing to modify mortgages, some real estate agents continue to encourage owners to agree to short sales, from which the agents take a 6 percent commission, according Pablo Geymayr, a former real estate agent and now regional director of Amerimod in Brentwood, N.Y. (A short sale is when the lender agrees to take less than what is owed in order to move the property, often forgiving the debt.) Geymayr said his agency charges only 1 percent on new loans they help negotiate and will return any fees if the agency is unable to help. "We don't want to cause more suffering," he said.
Asked who people can trust when they are in trouble, Louis Barajas, certified financial planner and author of several books including "Overworked, Overwhelmed and Underpaid," suggested that borrowers can turn to well-established nonprofits such as the National Endowment for Financial Education or the Financial Planning Association.
Last weekend Barajas was invited to an event in California sponsored by Wachovia to help individuals, particularly Latinos, modify their mortgages. More than 2,000 fliers were distributed but Barajas said only 30 people showed up. Regardless of their anxiety or sense of helplessness, borrowers "need to become more proactive," he said, and start to take matters into their own hands.
Special to washingtonpost.com
Friday, October 10, 2008; 12:00 AM
WASHINGTON -- There is something surreal about listening to a 35-year-old New York financial adviser describe his inability to put his own financial house in order.
"I am a finance guy with an ability to talk to people," he said, asking not to be identified for fear that it would hurt his reputation and that of his company. The self-described "Wall Streeter," who made more than a quarter-million dollars in 2006, owns a home in the Hamptons. As business faltered and his income plummeted, he tried to refinance to save his property. But when he went to the banks, "I got nothing."
Tracey Packer, a chief credit officer for a financial services company in Oregon, also sought help from the banks when she lost her job. Earning $135,000 a year plus bonuses, she bought a 2,600-square-foot house for her and her two children -- a purchase she could easily afford.
But when her company folded and she could only find temporary work, she couldn't make the payments. "The bank didn't give me any option," she said, and in January the house foreclosed. Recently the bank sold it for tens of thousands of dollars less than Packer paid, and now she waits to learn how much she owes on a house she no longer owns.
ad_icon
If the New York financial adviser had not turned to a mortgage modification agency for help, he could very well be where Packer is today -- out of his house. Instead, the agency, Amerimod, helped him slash the interest rate on his second mortgage from 11 percent to 7 percent, eliminate penalties and even reduce some of the principal. He is now waiting to hear about modified terms on his first mortgage.
Agencies such as Amerimod have leverage where individuals don't. They can present banks with several mortgages needing modification at one time. Often staffed by former real estate agents and mortgage brokers, these agencies know the system better than most individuals and have established relations with the banks.
However, some consumer advocates warn that these agencies proliferating at a time of crisis -- including those that present themselves as nonprofits -- are untested and could be a source of more consumer abuse. They are concerned that even as the federal government takes unprecedented steps to curb the excesses that led to the current financial crisis, some of the same individuals who were engaged in unsavory lending practices may now be moving to this new arena.
Aracely Panameno, director of Latino affairs at the Center for Responsible Lending, says that "caution" is crucial in this crisis, which her center estimates will extend until 2012 and put more than 6 million people at risk of losing their homes.
Panameno acknowledges that she is turning to some of the new nonprofits for assistance with her workshops such as "Mi Casa es Mi Casa Foreclosure Avoidance and Legal Clinic," to be held later this month in Prince William County, Va., where house values have dropped as much as 50 percent over the last two years. She believes that those who so successfully sold homes during the housing boom will use the same skills to advocate on behalf of borrowers facing foreclosure.
While recent government intervention should make banks more willing to modify mortgages, some real estate agents continue to encourage owners to agree to short sales, from which the agents take a 6 percent commission, according Pablo Geymayr, a former real estate agent and now regional director of Amerimod in Brentwood, N.Y. (A short sale is when the lender agrees to take less than what is owed in order to move the property, often forgiving the debt.) Geymayr said his agency charges only 1 percent on new loans they help negotiate and will return any fees if the agency is unable to help. "We don't want to cause more suffering," he said.
Asked who people can trust when they are in trouble, Louis Barajas, certified financial planner and author of several books including "Overworked, Overwhelmed and Underpaid," suggested that borrowers can turn to well-established nonprofits such as the National Endowment for Financial Education or the Financial Planning Association.
Last weekend Barajas was invited to an event in California sponsored by Wachovia to help individuals, particularly Latinos, modify their mortgages. More than 2,000 fliers were distributed but Barajas said only 30 people showed up. Regardless of their anxiety or sense of helplessness, borrowers "need to become more proactive," he said, and start to take matters into their own hands.
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