Making Home Affordable Analysis

Understanding the Making Home Affordable Government Bailout

Basically, there are two components of the Making Home Affordable government program which was just announced on or about March 4, 2009. The first component is the Modification Program and the second component is the Refinance Program. Although the program was announced to the public, the entire program is not yet finalized and there are details of this program which are still being worked out. Additionally, although many had hoped that this plan would solve all our problems, unfortunately, the government cannot force mortgage servicers to modify loans at this time. Thus, it is a suggestion to the lenders and servicers, not a mandatory requirement. Even if a financial institution has already received government funding, they are not required to participate. However, any financial institution that at any time in the future receives additional or new government funding will be required to participate.

Realistically, nobody has any idea how this will actually work at this point. Despite this fact, there are three components of the Modification Program. First, mortgage servicers are being offered financial incentives, by the government, to modify loans for certain borrowers. Second, the government will pay to the investors that own the loans, some percentage of any future losses which occur as a result of a property's further decline in value after a modification where the investors allow the servicers to modify a loan that subsequently ends up in the borrower defaulting again. Finally, the government will offer borrowers financial incentives if their modified loan is paid on time. The only properties that qualify for this program are primary residences. A borrower will have to prove financial hardship in order to qualify. Such hardship can be loss of income or job or an increase in expenses.

In order to qualify for the Refinance Program, a person needs to be current on his or her mortgage loan and have no late payments within the last twelve months. Additionally, the mortgage balance cannot exceed 105% of the current value of the home. Unfortunately, many people who purchased their homes with 106% financing, including a seller's concession, will probably not qualify as their homes have declined in value at a rate which far exceeds the amount of equity they have built up by making two or three years worth of mortgage payments. Finally, a loan will not be refinanced even if all of the above is met, if the outstanding mortgage is not currently owned or guaranteed by Fannie Mae or Freddie Mac. Persons that should consider the Refinance Program include anyone with an interest-only, balloon, negative amortization or adjustable rate mortgage, as well as anyone that has a fixed rate mortgage over 6.25%.

Despite this fact, there are options available to homeowners that are not being discussed in the general media. First, mortgage lenders and servicers were and will be continuing to modify loans, OUTSIDE OF THE MODIFICATION PROGRAM. For approximately the past year or so, I have had great success obtaining modifications for clients who can demonstrate an ability to repay their current loan. Although never a guarantee, the lenders and servicers will usually want to see the previous two years tax returns, copies of recent bank statements and pay stubs, as well as a "Hardship Letter" from the borrower attesting to the reasons why a modification is being requested. Thus, although voluntary, lenders and servicers were and likely will continue to modify loans where they are sure the borrower will be able to repay the modified loan.

Second, persons that have to sell their home in a miserable economy may be able to benefit from a "seller buydown". Basically, rather than drastically lower the sale price of a home, a seller can offer to pay for the buyer to "buydown" their interest rate by taking a portion of the sales price and using it to help the buyer obtain a much lower interest rate from their lender. The benefit is twofold. First, the buyer of their home will have a lower monthly payment. Second, because of the lower monthly payment, they will need less income to qualify. In the current economy where the banks require full income verification, it will increase the ability of potential homebuyers to qualify. Thus, less income to qualify means that the more potential homebuyers will qualify to buy the home. A further benefit is that the "comparable values" in the neighborhoods do not artificially deflate as a result of foreclosure and "short sales".

Another option for persons that are having a temporary crisis, such as a layoff or illness, but can demonstrate to the lender that their situation should return to normal, would be a forbearance agreement. A forbearance agreement is any agreement made between a mortgage lender and the borrower in which the lender agrees not to exercise a legal right it has, such as to foreclose on the mortgage, for a specified period of time. A forbearance agreement is designed for borrowers who have temporary financial problems. However, it may also be appropriate for people that can no longer afford the home, but have enough equity in the home that they can sell the home and recover some of this equity. Forbearance agreements include permitting the borrowers to remain in the home for several months without having to make a payment; or permitting them to make a reduced payment, as well as numerous other possibilities. All that is needed is a creative realtor or a creative attorney. Finally, it might be possible to do a "short sale" and get the lender to accept less than what the homeowners owe on the mortgage in full satisfaction of the debt.

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I am a New York Licensed Attorney at Law providing Wealth Building and Debt Elimination services through an innovative Life Planning practice where clients can literally transform their lives by designing a road map for their future!