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Obama's Foreclosure Plan: An Introduction

By Jeff Brown, sbup

Home foreclosures are growing at a torrid pace, up 30 percent in February over the same month a year ago. If you are among the millions of homeowners in trouble, President Barak Obama is offering help.

The Obama Administration announced two new programs in February and issued detailed guidelines in March. Titled “Making Home Affordable,” they provide ways for an estimated seven to nine million homeowners to reduce their monthly payments to avoid losing their homes.

Over the next few weeks will explore these programs in detail, show how to find out if you qualify and explain how to navigate the process. We’ll also look at some alternatives if you do not qualify.

Let’s start with an overview.

The foreclosure problem began with the housing bubble and loose lending standards in the middle of the decade. With home prices soaring, millions of people pushed up their borrowing limits by taking out new forms of adjustable rate mortgages that required only small monthly payments to start. Later, many of those loans reset to higher rates, requiring bigger payments.

Many of these homeowners began to fall behind. As the financial crisis took hold, lenders tightened standards, making it harder for troubled homeowners to refinance with loans charging lower rates. Then home prices began to fall, so that millions of homeowners ended up “underwater” – owing more than their homes were worth. As the vicious cycle progressed, even people with traditional mortgages were sucked under. The recession and rising unemployment pushed more homeowners into trouble.

Lawmakers have little interest in helping speculators and others who made bad decisions, such as buying second and third homes with high-risk loans. But many economists feel the crisis has hurt innocent bystanders as well. It has depressed home prices across the country and undermined the value of mortgage-backed securities, hurting banks and contributing to the collapse of the stock market. Financial institutions like Citigroup (Stock Quote: C), American International Group (Stock Quote: AIG) and JPMorgan Chase (Stock Quote: JPM) have been hammered.

President Obama believes that slowing the pace of foreclosures is a key step in beginning an economic recovery. Both his programs are limited to homes occupied by their owners, excluding investment properties and second homes from the rescue. Homeowners apply for each program by contacting their servicing companies – generally the firm that receives one’s mortgage payments.

The Home Affordable Refinance program is aimed at homeowners who are up-to-date on payments but unable to refinance to loans with lower rates because their properties are worth less than they owe. This program allows homeowners to refinance to fixed-rate loans with lower interest rates. To qualify, your mortgage must be owned or guaranteed by Fannie Mae (Stock Quote: FNM) or Freddie Mac (Stock Quote: FRE), the government mortgage companies.

The Home Affordable Modification program is for people having trouble making monthly payments because their interest rate has gone up or their income has gone down. Under this program, the existing mortgage is modified to reduce payments to 31 percent of monthly income. To do that, the interest rate may be reduced, interest payments may be skipped for a period, or the loan term may be extended to as long as 40 years. Homeowners who are behind in payments can qualify if they have enough income to make the new payments.

Next week: a closer look at the refinancing program.

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