Housing proposal: Clarifying the issue

Last week, we looked at the president’s Homeowner Affordability and Stability Plan and saw that it is largely directed at two groups of existing homeowners: Households that are either slightly behind on a home loan or at some stage in the foreclosure process (about 4 million owners) and homeowners who have never missed a payment but may not be able to hold on much longer (an additional 4 million to 5 million owners).

The plan uses a broad brush to help as many homeowners as possible stay in their homes. This solution brings with it a double benefit.

First, it slows the flood of foreclosures threatening our financial system. A refinanced or modified loan is less threatening than some 5 million to 9 million borrowers near the end of their financial ropes.

Second, it helps stabilize home values. Home prices cannot begin to recover until the glut of empty houses is absorbed and returned to service as clean, decent housing.

By keeping a family in their home, we experience one less vacant house that might have been vandalized and become a roadblock to a housing recovery. I met with homeowners last week, and here are some of the questions I have been asked about the plan:

Q. Who are the big winners under the president’s plan?

A. I’m not sure we can identify an actual winner, but anytime a homeowner is able to stay in his or her home as opposed to losing ownership and being forced to move, the homeowner wins. The first group of winners are struggling owners who have acted responsibly and kept their payments up. They will now be allowed to refinance at lower interest rates, even though their property values may have fallen. The second group of winners are those who are suffering under adjustable or exotic loan programs that consume 40 percent or even 50 percent of monthly income. They can now apply to have their loans modified so that the new payments are affordable, at least for a period of up to five years.

Are there any losers?

While the program seeks to help many households, it does not reach every homeowner. People who have already lost their homes to foreclosure will see no benefit. Also, there will be minimum qualifying guidelines for both the refinancing and the loan modification programs. If your income has dropped so severely that neither of these programs can provide affordability, you will see no benefit.

How is affordability measured?

Many borrowers are saddled with subprime or exotic loans that consume up to half their gross monthly income. Under the modification program, that borrower might see his or her monthly housing expense drop as low as 31 percent of monthly income. Experience has shown that a housing expense ratio of one-third monthly income is usually sustainable.

Who would pay for that modification?

To the extent that the payment drop would lower the housing expense from its current level to 38 percent of income, the lender would bear the cost. Then, to lower the cost to 31 percent of income, the government and the lender would share the cost. This modification would last for up to five years.

What will happen after five years?

At the end of the modification, the lender will be able to gradually increase the interest rate on an annual basis until it reaches the conforming loan rate in place at the time of the original modification. Because many borrowers will likely apply for this program in the near future, their modified rates will reflect today’s low rates.

Why would my lender agree to participate in this program?

Because taking a home back after a foreclosure is extremely expensive. Unless you have a substantial amount of equity in your home, it is unlikely that lenders would be able to sell it for enough to cover their costs.

What will happen to those who are not approved for modification?

This program is not designed to allow a homeowner to stay in a house he or she can’t afford. If borrowers do not meet the guidelines for a sustainable modification, this program will not benefit them. However, other programs may help.

If I am a homeowner struggling to make my payments, what should I do?

Call your lender at the number on your payment coupon and ask whether your loan will be part of the president’s housing plan. Lenders must agree to participate. Many major lenders have already indicated a willingness to be involved.

If my loan doesn’t qualify for this program, what should I do?

At the earliest sign of financial stress, I recommend you contact Consumer Credit Counseling Service of Atlanta at 1-800-251-2227. It offers excellent counseling for homeowners facing foreclosure as well as other financial challenges.

John Adams is a broker and investor. For more real estate information or to make a comment, visit ajchomefinder mortgage center.