Obama’s two-step housing proposal a good start

According to numbers from the Mortgage Bankers Association, there are about 55 million mortgages on homes in America today, and the payments are being made “on time” at about 51 million of them. That means about 4 million American households are either slightly behind on their home loans or are at some stage in the foreclosure process.

In addition to those, there are 4 million to 5 million homeowners who have never missed a payment but are struggling to make ends meet and may not be able to hold on much longer. This group includes those whose credit is still considered good but who are prevented from refinancing to a lower rate because falling home values have wiped out their equity.

It is these two groups that the president’s housing initiative tries to target. The ultimate goal of the plan is to keep as many homeowners as possible in their homes, paying an amount that they can afford each month for their home.

I have read the initiative and studied its features, and it appears to me a mixed bag of benefits; in all likelihood a reasonable first step toward putting a floor under the housing market.

I agree with Sen. Johnny Isakson (R-Ga.), who states that housing carried us into this economic mess and that it must be housing that lifts us out. Until we can stop the free-fall of home values, no amount of stimulus will prevent more foreclosures.

The administration’s Homeowner Affordability and Stability Plan is a two-step approach to help stop foreclosure and stabilize our neighborhoods. In a nutshell, here is how it is designed to work:

» Refinancing: Refinancing will be made available to about 4 million responsible homeowners who have kept their payments up despite the fact that they are stuck with bad loans.

This group includes buyers who currently are paying on exotic or subprime loans, as evidenced by programs that began with low teaser rates but have now exploded to much more expensive programs. Regardless of the problem, they are still current on their loans.

The most logical solution for these borrowers is to refinance at today’s low rates, but they are prevented from doing so through no fault of their own, primarily because of falling property values. For example, let’s say several years ago you took out a 30-year fixed-rate mortgage of $200,000 with an interest rate of 6.750 percent on a house worth $250,000 at that time. Today, your balance is $195,000, but perhaps the value of homes in your area has fallen 15 percent, so your home now appraises for $212,000.

Under current conventional refinance rules, you would not qualify for a new loan due to lack of equity. Most lending programs today seek at least a 20 percent equity position.

The proposed stimulus plan would allow you to obtain a loan of up to 105 percent of the current appraised value of your home, and even to include closing costs in the new loan amount. By lowering your interest expense to today’s low rates, you might now be able to stay in your house and afford the lower fixed-rate payments.

You would still have to qualify for the new loan under typical approval guidelines, and the proposal only applies to borrowers whose existing loans are insured or guaranteed by Fannie Mae or Freddie Mac — that’s about half of the loans on the books in America today.

In my opinion, this refinancing proposal makes good sense. It simply allows the responsible homeowner to act as he would have done if falling home values had not trapped him in his existing bad loan. The mortgage industry expects borrowers to refinance when rates drop, and it should have offered this option by itself without government prodding.

» Modification: The second part of the initiative is more difficult to explain in this space, but here goes:

If you are currently behind on your payments or are in imminent danger of becoming past due, then the Homeowner Stability Initiative may be helpful to you. This program seeks to lower payments to an affordable level for a five-year period, allowing the borrower to become stabilized and the housing market to recover.

The initiative, as envisioned by the administration, would be a joint effort between the lender and the government, causing the interest rate on your home loan to be lowered to a rate at which the total housing expenditure in your budget would be no higher than 31 percent of your gross monthly income.

If this sounds surprisingly similar to the old-fashioned “front-and-back” ratio system of qualifying for a home loan, you have discovered the simplicity of this proposal. The theory is that anyone can typically afford to spend one-third of their gross monthly income on their housing payment, usually consisting of principal, interest, taxes and insurance.

For many years before the advent of credit scores and desktop computer approvals, lenders worked for hours to confirm that borrowers fit this conservative model of loan approval. This initiative is a throwback to an approval guideline that worked well in the past.

Both government and lender will share in the cost of artificially lowering the interest rate, and the lowered rate will stay in place for five years. After that, the lender may begin gradually stepping the rate up to today’s current fixed rate for such loans, around 5 percent.

The government plans to offer a dizzying array of cash incentives to both lenders and owners who modify their loans and then follow through and keep their loans current. Homeowners can receive as much as $5,000 if they don’t miss a payment. Lenders get cash bonuses to join the program.

I know this is a quick overview, but it looks like a good first step to me. Only time will tell if it will impact the foreclosure market for the better.

Mr. President, we all hope you succeed.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.