Sunday, February 22, 2009

Obama's Homeowner Help Plan, Part 1

edited 2-23-09 at 9:57am to fix all my broken links; sry!

Late last week, President Obama announced his plan to help 7 to 9 million American families restructure or refinance their mortgages to avoid foreclosure. It's called the Homeowner Affordability and Stability Plan.

Many plan details are still being worked out, and the White House said it will announce full details on March 4. But for the moment, here’s what we know about the broad outlines of the plan.

The plan has three prongs: (1) help folks refinance, (2) help lower monthly mortgage payments, and (3) provide government support to keep mortgage interest rates low.

I’ll cover the President’s new plan in three successive blog posts. First up, the refinancing initiative.

The first program in the plan is aimed at helping homeowners refinance their mortgages into fixed-rate loans at today’s lower rates.

How might this help? If you can refinance your mortgage into today’s historically low mortgage rates, you might save a bundle every month on the payments.  Obama’s people hope the monthly savings from mortgage refinancing will make consumers go out and buy stuff again. If that happens in large enough numbers, voila!, recession ended, and oh, yeah, housing crisis solved too.

Example: A $200,000 mortgage at 7.875% results in a $1,450 monthly payment. Refinance into a new loan at today’s rates (you can get about 5.875% today, give or take) and your payment drops to $1,183 monthly. That puts an extra $267 in your pocket every month. For a mortgage of this size, every time rates drop 1/4 of  percent the homeowner has an additional $31 in his or her hands at month end.

Why do we need a government “plan” to accomplish this? Homeowners with less than 20% equity in their homes are finding it very difficult to refinance now, and too many Americans don’t have 20% equity anymore, thanks to plunging housing values. Lenders were burned badly in this housing bust and they’re being overcautious, hesitating to lend to folks who really need the help. It’s like the old “joke” my dear Dad tells: you can only get a bank loan if you don’t need the money.

Won’t this just result in more of the same problem that got us here, irresponsible lending and exotic loans? It could. Obama’s people say they’ll add rules that forbid balloon payments and pre-payment penalties on the new, refinanced mortgages. HUD has already enacted reforms in the lending world that affect Good Faith Estimates and HUD-1 Settlement Sheets, in an effort to help consumers avoid predatory lending practices. In addition, this new refinancing initiative is only available to homeowners with conforming loans (under $417,000 in Maricopa county) that are backed by Fannie Mae or Freddie Mac. By the way, if you bought the Republican party line that “it’s all Fannie and Freddie’s fault”, read my past posts about The Two F’s, or read part 3 of this series.

My take on this part of Obama’s plan. The word is homeowners can refinance only up to 5% more than the current market value of their home. For most Phoenicians, that’s not helpful because our average home values dropped way more than 5% from their peak prices. Outlying parts of the Valley have seen home values plunge more than 40% to 50% since the peak.

Also, it seems to me that the homeowners struggling the most don’t have mortgage rates as high as my example. Rates through the boom years held at under 6.50%, sometimes much lower. Homeowners with adjustable rate mortgages that adjusted in the past few months probably saw their rates (and therefore their monthly payments) drop already.

Bottom line, I don’t think many homeowners in metro Phoenix will be able to take advantage of this provision of Obama’s new plan. But if you qualify for a refinance, I highly recommend you look into it.

Is This Refinance Plan for Me? First, your mortgage must be no larger than $417,000, the conforming loan limit for Fannie/Freddie backed loans. Second you must be no more than 5% underwater on your home. Third, you’ll have to wait till March 4 like all of us to hear the fine print of this new plan. Finally, Obama’s announcement stresses that help is available for “responsible” homeowners. No word yet on how they’ll define that, although the President specifically shamed “speculators” in his announcement of this plan.

As for the mechanics of the refi itself, there’s a ton of data and advice on the net aimed at helping you determine if refinancing is “worth it”. All the advice boils down to 2 numbers: (1) how much will the refi cost? and (2) how much will it save me per month?  Once you have those numbers, divide the refi cost by the monthly savings in your mortgage payment. If you plan to keep your house for that many more months into the future, it’s worth it to refinance.

Again, the government plans to unveil the final details of the plan on March 4, 2009. For now, you can access this blog post from the White House which describes 3 scenarios under which you might be helped by the new Homeowner Affordability and Stability plan.