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Foreclosure Help – How Will It Work?

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2-20-lead1RISMEDIA, February 20, 2009-(MCT)-President Barack Obama unveiled a $75 billion federal plan to ease the epidemic of home foreclosures on Wednesday, casting it as not just a bailout for as many as 9 million homeowners but a means for ending the downward spiral of the economy. Here’s what’s in Obama’s plan for you:

Q: Who will benefit from this plan?
A: The plan is designed to help two kinds of homeowners. The first are homeowners who took out prudent mortgages with a substantial down payment but whose home value has declined so much that they have little or no equity left. The second group are those who are struggling to make their payments–perhaps because of a job loss or perhaps because of a change to their mortgage rate-but who have enough income to continue to make mortgage payments that amount to 31% of their income.

Q: How does the refinancing program work?
A: Borrowers who have existing conforming loans can apply for a refinance through their existing lender. If they meet the program requirements, including that they occupy the home and can document their income, their lender may be able to offer a lower-interest rate loan backed by Fannie Mae and Freddie Mac.

Q: How does this help people who owe more money on their mortgages than their homes are worth?
A: Currently, many borrowers whose homes have lost value because of the housing market collapse do not qualify to refinance into lower-rate mortgages because they do not have enough equity in their house. Under this program, borrowers with conforming loans will be eligible to refinance through Fannie Mae and Freddie Mac even if they have little or no equity in their homes.

Q: If they’re making their payments on time, why do they need help?
A: The administration wants to bring stability to the housing market without rewarding people who made greedy or irresponsible financial choices. By refinancing people who are making payments on mortgages larger than their homes are now worth, the government will reward people who play by the rules and reduce the likelihood that creditworthy borrowers will “walk away” from underwater mortgages. The administration believes that will help put the brakes on the vicious cycle by which plummeting home prices lead to more foreclosures, which further reduce home values for everyone in a community.

Q: What about people with “jumbo” mortgages?
A: Sorry. The administration plan does nothing for people with mortgages larger than the conforming loan limits set by Fannie Mae and Freddie Mac. They note that “jumbo” loans account for only 2% of mortgages issued nationwide.

Q: What about helping borrowers with problems on second mortgages?
A: Sorry, again. Any modification or refinancing would apply only to the primary mortgage.

Q: How does the loan modification program work?
A: This program is only for “at-risk” borrowers who are struggling with mortgage payments above 38% of their income. Under the program, if the lender agrees to lower the interest rate or reduce principal to bring the payment to 38% of the borrower’s income, the government will pay half of the additional cost to the lender to reduce the payment to 31% of the borrower’s income.

Q: Isn’t this just rewarding people for making bad decisions and irresponsibly getting in over their heads?
A: The Obama administration says the rules of the loan modification plan will exclude housing speculators and borrowers with high debts. Homeowners will have to reside in the house, be able to document their income, and demonstrate the ability to continue to make the new payment for an extended period of time. The aim of the program is to reduce the foreclosure rate for people who can keep paying on their mortgages and thereby prevent further erosion of property values in the surrounding community.

Q: How are these programs different from what was already available?
A: Both programs do not require borrowers to be behind in their payments in order to apply. In fact, in the case of the at-risk borrower program, the government will pay servicers more-$1,500 instead of $1,000-if they modify a loan before a borrower goes into default.

Q: What if I’m already in foreclosure?
A: It is up to your lender whether they want to participate in the program. The government has increased the fees and incentives for lenders to encourage more participation, but it is ultimately the lender’s choice.

Q: What if I declare bankruptcy?
A: Currently, bankruptcy law does not permit judges to modify the terms of mortgages for borrowers in bankruptcy. The Obama administration would like Congress to amend that law, but it would require new legislation and many lawmakers oppose the idea.

Q: How much will the Obama plan cost taxpayers?
A: The administration estimates the cost of the program at $75 billion. About $50 billion would come from bailout funds already approved by Congress and it would be used to pay fees and subsidies to lenders who offer loan modifications to qualified borrowers. The administration estimates that it will cost Fannie Mae and Freddie Mac about $25 billion to refinance conforming loans under the new equity terms. Those funds are already in the budget of the mortgage giants, which were taken over by the government last summer. The administration argues that the $75 billion cost of the programs is far less than the economic and social toll of the ongoing housing crisis.

Q: When do the new programs take effect?
A: Details will be released on March 4, but administration officials said the new programs are in effect immediately. Much of the plan does not require congressional approval.

© 2009, Chicago Tribune.
Distributed by McClatchy-Tribune Information Services.

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