Obama's Housing Rescue Plan Simplified

Obviously there is a lot of information coming out of the Obama camp and getting the answers can be frustrating. After all, knowing that there is help out there means nothing if you don't know what that help is. I will try to simplify it as best I can:

The first part of the program, called Home Affordable Refinance, is aimed at homeowners whose property has lost value as housing prices have plummeted. It is only open to borrowers with conforming loans backed by Fannie Mae and Freddie Mac (no FHA, VA, or subprime). The program does not reduce principal, but rather allows the borrower to refinance up to 105% of the current value. Usual fees would apply, though for many borrowers the procedures would be streamlined. Unfortunately, since most values have doped over 40%, this program will help only a small amount of people in my opinion. Interested borrowers should contact their loan servicers to determine whether their mortgages are held or guaranteed by Fannie Mae or Freddie Mac. You can also contact me to determine what your home is worth if you are unsure.

The second program, called Home Affordable Modification, is more complex (and more interesting) and is aimed at borrowers whose mortgage payments have become unaffordable either because of a hardship such as job loss or illness or because the interest rate has been reset higher on an adjustable-rate mortgage.

For those borrowers, the government would provide cash payments and financial subsidies to help the lender lower the monthly payment to no more than 31% of the borrower's gross monthly income. In most cases the lender would reduce the interest rate on the loan to as low as 2% for five years. If that was inadequate to bring down the payment, the lender also could extend the term of the loan to 40 years or temporarily reduce the loan principal. In those cases, the set-aside portion of the loan principal would be repaid to the lender in a balloon payment when the house was sold or refinanced.

The 31% target income level would apply only to the borrower's primary mortgage payment; second mortgages, home equity loans and other consumer debt would not be included in that calculation.

However, administration officials said they would offer additional financial incentives to servicers to reach agreements with second-lien holders to accept partial repayment of those debts. Details of that policy are still being worked out.

To address the problem of borrowers who default again on mortgages, the government would provide additional payments to lenders and servicers the longer the borrower stays current on the loan. And borrowers would also see a benefit: For each of the first five years that they continue to pay the mortgage, the government would reduce the loan principal by $1,000.

And those whose interest rates are reduced below market value would see rates float back gradually after the initial five-year loan period -- at 1% a year, up to the market rate on the day the loan modification was signed. Interested borrowers should contact their servicers directly, administration officials said, and should pay no fees to access the program.

Finally, if neither one of these programs work for you, or perhaps you have an investment property, you still have the option to Short Sale it and spare your credit the stigma of Foreclosure...