The Obama administration on Wednesday began the most ambitious effort since the 1930s to help troubled homeowners, offering lenders and borrowers big incentives and subsidies to try to stem the wave of foreclosures.
But it does little for borrowers who have had significant jolts to their income, or who owe more than their home’s value on loans that exceed $729,750. In boom-and-bust housing markets like Florida, Las Vegas, Phoenix or California, where values have fallen 30 percent to 40 percent, the plan leaves many in homes they cannot afford — some because they borrowed recklessly, others because they were buffeted by the market swings.
To help make sense of the housing rescue plan, Times reporter Tara Siegel Bernard offers more detail on the plan and its requirements. Additionally, Ms. Siegel Bernard, along with Times reporters Edmund L. Andrews and John Leland, are taking reader questions.Edmund L. Andrews is an economics correspondent who has been covering the mortgage crisis since its inception in 2007. He reports on efforts by the Treasury and Federal Reserve to combat the financial crisis. His articles have also covered the mortgage relief plan introduced by the Bush Administration and the restructuring of Fannie Mae and Freddie Mac.
John Leland is a national correspondent who has reported from the homes of Americans coping with the foreclosure crisis, including articles on owners who walk away, take in roommates, succumb to swindlers or band together with community groups to stabilize an at-risk neighborhood. His stories have taken him from a mass auction of foreclosed properties to abandoned homes that have been recolonized by bees, and to the homes of renters who have lost their home because the owners defaulted.
Tara Siegel Bernard is a personal finance reporter, and has previously written on the Obama administration’s housing plan, offered advice on how to qualify for a mortgage backed by the Federal Housing Administration, and answered readers’ questions on the tax breaks and benefits for individuals in the economic stimulus package.Questions and Answers
I just don’t get it. What guarantee did any of these people think that their house would continue to rise in value? Why should they receive special treatment when those of us who rent because we were smart enough to realize that we couldn’t afford to buy a house are getting nothing for our stock portfolios that have lost 50 per cent of their value? My mutual funds were supposed to keep gaining value. Where’s my help from the government? Where’s my retirement?
Bernard Madoff wasn’t the only one who ran a big Ponzi scheme.
— SML
Mr. Leland: After the articles ran I heard from many readers who were outraged that buyers who borrowed more than they could afford were getting bailed out by the government. This backlash seems to be a strong and widespread sentiment in the air at the moment, leveled at the auto companies, the banks and homeowners. But in all cases, there are collective consequences to letting them fail. If your neighbor’s house goes into foreclosure, your house drops in value. On the other hand, if bailout measures ultimately lead to higher interest rates, that also depresses your house price. And at some point we will all pay higher taxes.
Mr. Andrews: Believe me, millions of people agree with you. Unfortunately, and nothwithstanding how many times President Obama talks about helping “responsible” homeowners, this is not really about fairness. It’s about rescuing the economy — and all of us in it — from a really horrific depression. Many, many people who are in trouble made reckless decisions and many of those people probably knew in their gut their decisions were unwise. But the main rationale for this program is that we are all in this mess together. Foreclosures are dragging the housing market deeper and deeper into the vortex, and the housing market is the single biggest cause of the financial crisis and the economic recession. This recession, by the way, is already worse than anything since the early 1980s and I would be surprised if it doesn’t turn out to be worse than any other downturn since the Depression. None of these bailouts — for AIG, for banks, for the car companies and for homeowners — are really based on the idea that the beneficiaries “deserve” to be rescued. On Tuesday, the Federal Reserve chairman, Ben Bernanke, told the Senate Banking committee that nothing in the past 18 months had made him angrier than the collapse of AIG, the insurance conglomerate. And if you listened to the way he said it, he sounded like he would have loved to start stringing the company’s executives up. Despite that, he has passionately insisted that it would be disastrous for the country to let the company collapse.
It’s true that we don’t know exactly what would happen if AIG collapsed, or Citigroup collapsed, or housing prices plunged another 50 percent. But both the Obama administration and the Federal Reserve are operating on Franklin D. Roosevelt’s famous analogy: if your neighbor’s home is on fire, you help to put it out so that your own house doesn’t burn down.I’ve seen this plan referred to as a “$75 billion” plan. But could someone explain what exactly that dollar amount means in terms of how the government’s intervention sends money from one place to another? I keep reading general terms like “incentives” and “subsidies” but I’ve yet to see a very detailed and clear accounting of how the infusion of capital here works to actually get to the level of the homeowner and the refinancing of the existing loan. Does the mortgage holder who participates in this program and agrees to refinance the loan make additional money off the deal? Where does the $75 billion really wind up in the end and in whose pockets?
— confused
But in very simple terms, the mechanics come down to this: the government will be writing checks to your lender to cover part of the cost of reducing your monthly payments. The Treasury will pay the lender $1,000 for each loan modified, another fee if it modified the loan before you went delinquent and additional incentive payments of $1,000 per year for three years if you stay current. On top of that — and this is where the real money comes in — the Treasury will be matching dollar for dollar the cost of reducing your mortgage payment from 38 percent of your monthly income to 31 percent. Last but not least, the government will send the lender a check for $1,000 per year to reduce the size of your loan amount. That’s money for you, the borrower, but mechanically it goes to the lender who then reduces the amount you owe.
There’s a lot that you and the lender both have to do before any of this happens. We talk about those issues elsewhere.What are the chances that we do away with the utterly unnecessary — and now harmful — practice of subsidizing mortgages through tax breaks? If home ownership were so great, what do we need government subsidies for? This society already over-fetishizes homes; government is double-underlining a bad habit.
Conservatives can go around talking about gay marriage and government encouraging lifestyle choices, but here is a real-life example of government pushing a lifestyle choice on its people — one that has truly proven harmful to even those of us who didn’t partake of that lifestyle.
— Mr. Anderkoo
Mr. Andrews: You raise a great question: when will the goverment stop subsidizing mortgages through the tax code? It also speaks to an important point that is usually ignored: a lot of people would be better off renting their homes rather than buying. But the tax breaks essentially force many people to buy, because they can’t afford to leave that much money on the table.
Politically, the answer to your question is probably “never.” There are simply too many incredibly powerful interest groups who defend the mortgage deduction and the rest as crucial to the American Dream. But, economically, the arguments against the mortgage tax breaks are utterly irrefutable. In the long-run, the tax breaks do absolutely nothing to reduce the cost of homeownership. They simply elevate the market value of houses above what they would be otherwise, so the buyer pays a higher price in exchange for bigger tax deductions.The real estate agents, the lenders, the home-builders all benefit enormously, but for homebuyers it all ends up a wash. But it’s worse than that. The tax breaks continue to provide the greatest subsidies to high-income people who buy expensive houses, have huge deductions and are in the top tax bracket. They also subsidize people who borrow more than they can afford. Bottom line: the tax breaks don’t make homes more affordable, they disproportionately benefit the wealthy and they probably encourage excess borrowing.
I’m seeing conflicting information with regard to the entity servicing the loan. Is it true that only Fannie/Freddie loans are eligible? Or is it true that any institution that took TARP funds must offer these terms?
— Rusty
Almost every advice exchange that I see boils down to this:
Question: Do I qualify for refinancing assistance program (details are usually given)?
Answer: Yes, if your mortgage is held by Fannie or Freddie Mac.
Question: How can I tell that?
Answer: Call your lender.
How in the world can all these people simultaneously get through to their lenders, as is advised? Is there no other information source to answer this critical but very simple question about their mortgage? Perhaps Freddie and Fannie themselves could tell people or have information online? My own mortgage company has info online about my payments — couldn’t it share this info the same way?
I hate to think of people on the line for hours or days, desperately seeking such a simple fact. It reminds me of the people after Katrina trying to reach their home insurance companies. Not a good scene.
— Fairfax Voter
As I understand the published reports, the Obama plan covers only those homes covered by Freddie Mac and Fannie Mae. Is this correct? If it is correct, is there a plan now or in the future that will cover those who have high interest rates and monthly payments and can no longer pay the monthly payment. If there is such a plan, how do I contact them?
— Michael iRichmond
How does one determine whether Freddie/Fannie guarantees one’s loan? What are the steps one can take, or whom does one contact to determine eligibility?
— amper
Mr. Leland: The plan has two parts. Only Fannie and Freddie loans are eligible for refinancing. That’s because the government already owns the risk on these loans. If you are not in a government-backed loan, and your payments are above 31 percent of your gross monthly income, you may be eligible for a modification of your rate.
Fannie and Freddie back about half of all mortgages. Most borrowers can’t tell from their mortgage statements whether their bank sold their mortgage to the agencies, to securitized trusts, or held it in portfolio. Contact your mortgage company or the agencies —for Fannie Mae,1-800-7FANNIE (8am to 8pm EST), fanniemae.com/homeaffordable; for Freddie Mac, 1-800-FREDDIE (8am to 8pm EST), freddiemac.com/avoidforeclosure.
Ms. Siegel Bernard:
Remember that this is a huge undertaking, and the mortgage servicers and lenders are still preparing for the influx of calls. You might not get through the first time you call, so be persistent. The administration is also planning to post a tool on its “Making Home Affordable” Web site that will enable borrowers to look up who owns their mortgage. It may be live as early as next week. Stay tuned.
I called my lender, Bank of America, and the rep said she could not tell me whether my loan was secured by Freddie/Fannie. She said it was against policy. Instead, she said I needed to apply for refinancing first and then would be notified if I was eligible for the program. Are lenders and servicers obligated to release this information to homeowners?
— Michael
My husband and I bought (our first) house in 2006 with a conventional 30-year fixed mortgage and 20 percent down. Although our house has lost about 8-10 percent of its value, we are not underwater (yet), and our payments are affordable.
So our LTV ratio is about 90 percent. If our loan is secured by Fannie and Freddie, we would be interested in refinancing, but any money saved would be wiped out if we had to pay PMI (because our LTV is higher than 80 percent). Do the “responsible borrowers” who take advantage of the refinancing rule in the housing rescue plan have to pay PMI if their LTV ratios are greater than 80 percent?
— Jessica Johnson
Mr. Andrews: You sound like a perfect candidate for the refinancing program through Fannie and Freddie. You will have to pay refinancing fees, but the odds are you would be able to get a lower interest rate on an equally sound mortgage. And you would NOT have to pay PMI. The whole point of the Fannie-Freddie deal — the only point, really — is to help people lock in today’s lower rates even if they don’t have 20 percent equity. Unless your current rate is already very close to 5 percent, this should be a no-brainer for you.
What would be your recommendations for a homeowner who is currently renting out her townhouse because she couldn’t afford the payment on her own? She is also subsidizing the difference between her payment and the collections in rent. The lender has been unwilling to renegotiate the interest rate to help reduce the monthly payment, and the owner is unemployed, which makes even the most meager of payments impossible.
— Laura Doane
Mr. Leland: The bailout plan applies only to primary residences and offers little help to people without income. In different times when people lost their jobs they could sell their houses, painful as that might be. Now homeowners who are underwater do not have that option. I’m not a housing professional so I don’t give financial advice, but there might be options available to you short of foreclosure, such as short sales or giving back the deed in lieu of foreclosure, which don’t damage your credit like a foreclosure does. Or personal bankruptcy. But these are matters to discuss with professionals.
Ms. Siegel Bernard: You should speak with a professional to weigh your options before you start missing payments. That way, you can try and minimize any damage to your credit score. Start by reaching out to a counselor approved by the U.S. Department of Housing and Urban Development. You can find one in your area. These services are free.
I worked two jobs for the past three years and paid down my mortgage from $500,000 to $300,000. I now lost my job and can’t afford to pay. I paid $540,000 for my house and the value value has dropped by $100,000. What benefits can I get? I feel stupid now for working so hard to pay down my debt.
— G. Shlagel
Mr. Leland: If you owe $300,000 on a house valued at $440,000, you may be a candidate for refinancing to a 30-year fixed mortgage at around 5 percent interest — if your loan is backed by Fannie Mae or Freddie Mac. Your lender or loan servicer can tell you whether this is the case. If not, and you are struggling, your lender has incentives to modify your monthly payments to 31 percent of your gross monthly income. The government has an excellent website, financialstability.gov, to walk you through the steps.
Mr. Andrews: Alas, no good deed goes unpunished. But don’t lose hope. First, your house probably isn’t underwater. You could sell it and still pull cash out to weather the downturn. But the $75 billion program was designed primarily for people like you: responsible borrowers who have fallen on hard times. The hardest challenge for you is likely to be in credibly demonstrating that you will have enough income to support even a much lower monthly payment. But your lender is likely to be very impressed by your payment record. You’re obviously the kind of borrower that’s more likely to be a secure bet for them. Also, there are a lot of ways to modify a loan — reducing the interest rate, stretching out the loan term (doesn’t reduce your ultimate obligation, but will lower your monthly payment) and ultimately reducing the principle amount. You absolutely should seek a loan modification. If they initially say no, or offer an inadeuqate proposal, push them.
Are there any provisions for homeowners who bought homes near or at the top of the market, and have paid their mortgages faithfully? It seems a little unfair that the people who haven’t paid are the ones getting the help, while those of us who have paid would get much less for our homes if we were forced to sell. We would owe money to the bank after the sale if the sale value is less than the value of the mortgage. How is the administration addressing this?
— paid on time
Mr. Leland: One criticism that some economists have leveled at the bill is that it does not do enough to address the problem of negative equity because it is aimed at reducing payments, not balances. This leaves a lot of people in overvalued houses, conforming to a bubble that has already popped.
Depending on how underwater you are, you may be eligible for a loan modification. Again, the government’s website, financialstability.gov, is a good place to start your inquiry. Beyond that, if the bill prevents your neighbors from foreclosing, it reduces the damage to your house’s value.
Are the banks still charging typical refinancing closing costs under this plan?
By not including borrowers who are severely underwater, doesn’t this almost ensure that these people will simply walk away from their homes, thereby dragging the overall market even further downhill?
— DC
Mr. Andrews: Very important point: borrowers should not have to incur any fees to have their loan modified under the Treasury’s new plan. Undoubtedly, banks and mortgage servicing companies are going to try to slip a few of them in. But the Treasury says flatly that borrowers should not be paying any upfront fees or points for having their loan modified.
That is NOT the case under a different component of the plan, the refinancing opportunity through Fannie and Freddie for people who are current on their payments and whose mortgages are secured by Fannie or Freddie. In that case, you are simply getting the chance to refinance at a lower rate without necessarily having 20 percent equity. It will be a good deal for some people, but it won’t be free.
My husband I have never owned a home, and our dream is to build a small passive solar house for our family. The cost of building a passive house is somewhat higher (3-10 percent) than a comparable standard home. My questions are: 1) Will we see the same benefits as first-time buyers if we are building our own home, and 2) will the cost of building a home with energy-efficient materials go down as a result of incentives included in the stimulus package? We were planning to wait two years before undertaking this in order to save up a bit more, but I wonder if 2009 will offer enough incentive to push us to act earlier? Thank you.
— laprofeRiddle
Mr. Andrews: The Obama plan isn’t really designed to help first-time homebuyers. However, Congress did include a lucrative tax credit in the new stimulus bill that is worth up to $8,500 [See correction below]. You would need to see how it works for people building their own homes, but I would be surprised if you couldn’t find a way to benefit from it. The tax credit is NOT refundable [See correction below], which means you can only benefit from the credit to the extent that you owe that much money in federal income taxes.
Update from Mr. Andrews: I apologize; I provided some inaccurate information about the new tax credit for first-time homebuyers. The tax credit is for $8,000, not $8,500, and it is indeed refundable. Contrary to what I said earlier, you can get as much as $8,000 back from the Internal Revenue Service even if you don’t owe any federal income tax this year.
But there are some other details that that are very intriguing. According to Roberton Williams, a fellow at the Urban-Brookings Tax Policy Center, the definition of “first-time homebuyer’’ is pretty flexible: a person who hasn’t bought a home in the last three years. That would cover a great number of people who wouldn’t think of themselves as “first-time” buyers. Technically, it only applies to homes that a person buys between January 1, 2009 and November 30, 2009. (No, that’s not a typo. It’s November 30, not Dec. 31. I have no idea why.)
But here is the important wrinkle: you don’t have to wait for the money until you file your tax return for 2009. If you buy the house this year, Mr. Williams says, you can claim the tax credit on your 2008 tax return and get the money almost right away. If you have already filed your 2008 tax return, you can file an amended return and still get the money this year.
I’m worried that inquiring about whether I can qualify will be reported to credit agencies and my credit rating will suffer, even if I don’t qualify and I continue to pay my mortgage on time.
— Dave S.
I believe I read that under this plan, the borrower has to sign a statement that he/she/they cannot afford their mortgage payments. Will this put a blot on their credit rating for the future?
— EveT
Will a homeowner who obtains relief under either of the plans suffer a drop in credit rating, and, if so, what would be the likely impact of each plan?
— JMB
Ms. Siegel Bernard: The refinancing portion of the plan will not affect your credit score. You’re simply being given a one-time opportunity to refinance your mortgage at attractive terms. It’s the same as if you refinanced your mortgage outside of the program.
A loan modification, however, will hurt your credit profile. But you have to consider your other alternatives and how much they would affect your score. A foreclosure, for instance, a short sale, or deed in lieu of foreclosure are all classified as accounts that were “not paid as agreed,” according to Fair Isaac’s Web Site. (Fair Isaac is the company that conceived the credit score known as FICO.) All of those options would hurt your score equally. Foreclosures remain on your record for seven years, but if you pay all of your other bills on time, your FICO score can begin to improve after two years.
It’s still unclear exactly how much a loan modification will affect your score. But it’s not likely to hurt any more than a foreclosure or the other alternatives. And if you modify your loan, there’s a big bonus: Y ou get to stay in your home.
A bankruptcy is likely to have an even more negative impact on your score. A foreclosure — or a loan modification, for that matter — counts only as one account that you were unable to repay. With a bankruptcy, you are defaulting on many more accounts.
Have a question with respect to the refinance portion of the plan. According to the plan, an owner can refinance even if the owner’s outstanding loan is as much 105% of the home value. The question is whether the 105% value rule is for only the 1st mortgage or is it for the 1st and 2nd mortgage combined (in the combined case, a lot more homeowners could be out of the reckoning for the refinance option).
— AG
In addition to the current 1st mortgage, can a 2nd mortgage be included in the loan restructuring, home rescue plan? In other words, can a refinanced loan through this program include both a 1st and 2nd mortgage?
— John
Mr. Leland: It’s only for the first mortgage.
I guess I’m not greedy enough. We exited the market in 2003 and didn’t invest the proceeds into flipping properties. We are still waiting to get back into home ownership. Can you let the home prices fall a little more? What’s in it for the new homebuyer who can really help the market? Nothing.
— Charles
Ms. Siegel Bernard: There is a nugget inside the stimulus bill for home buyers, as long as you haven’t owned a primary home for three years. It sounds as if you fit that profile.
The stimulus bill provides first-time home buyers with a refundable tax credit of up to $8,000 for purchases made after Jan. 1, 2009 but before Dec. 1, 2009. The credit phases out for single taxpayers with adjusted gross incomes that exceed $75,000 (or $150,000 for married couples filing jointly). Since the credit is refundable, that means you’ll get money back even if you don’t owe that much in taxes. But if you sell the home within three years, you’ll forfeit the credit.
Most news reports say that to reduce mortgage payments, a lender would reduce the interest rate, lengthen the loan period, and/or reduce the principal. But what other methods might they use, and which ones should I try to stay away from? For example, I heard that a lender may reduce payments by requiring a balloon payment at the end of the loan. That seems highly risky for the borrower. Or is it? Please list some possible methods I should favor or stay away from when negotiating with the bank. Does the borrower have any say in formulating a way to reduce monthly payments? Or will it be take-it-or-leave-it?
— John K
Ms. Siegel Bernard: You raise an important point. And yes, some borrowers may end up owing thousands of dollars at the end of the loan’s term, also known as a balloon payment.
Whether that happens depends on your individual circumstances. The lenders must follow a specific formula to reduce your monthly payment to 31 percent of your gross income. To get there, they must first reduce your rate (it can drop to as low as 2 percent). If that doesn’t get you to the magic number, they can extend the term of your loan (up to 40 years). After that, they have the option to defer a piece of your principal. That’s what can result in a balloon payment — if any portion of your principal is deferred, it will be owed when the loan is paid off or refinanced, or when the home is sold. Fortunately, it won’t accrue any interest.
But here’s where it gets tricky. It appears that you can also end up with a balloon payment if your lender extends the amortization period of your loan (this lowers your payment), but not the loan’s term (that’s when the loan must be paid in full). That’s probably because the lender doesn’t want to lengthen the period it will take to be repaid, explains Bob Walters, chief economist of Quicken Loans. Or, the lender may be prohibited from doing so given contractual obligations to the loan’s owner. To avoid a balloon payment, at least in this scenario, you need to make sure the amortization period and term of the loan are the same.
Ask for a full explanation of the loan modification and whether the steps the lender has taken will require you to come up with a pile of money at the end of your loan’s term.
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