Unless you’ve turned off all media in your home/computer, you may have noticed the housing mess that’s currently underway in the U.S. The housing mess has left millions of homeowners with upside down mortgages which can (and has) ultimately lead to foreclosure.
But who should be responsible for this mess? The government and their deregulation? The financial institutions and their predatory tactics? Or the ignorant homeowner who assumed that future unaffordable payments (when their teaser rates expire) could be fixed via refinancing? Perhaps they all play a part in this perfect storm that has rippled across the globe.
So the question of the day is, does the government sit back and let things play out, or do they jump in and try to intervene? With the severity of the downturn, I’m not sure the government had much choice other than to try to do “something”. This something came in the form of throwing money at the problem which they call the bailout package.
As part of a huge bailout package, they’ve recently announced details regarding how the government is going to help homeowners in America.
According to NyDailyNews:
The two rescue plans are:
- The Home Affordable Refinance program, aimed at up to 5 million people who can’t refinance at lower rates because their home values have been hammered in the downturn.
- The Home Affordable Modification Program, a more complicated effort aimed at up to 4 million people facing hard times who are in danger of slipping into foreclosure.
As you can see from above, there are 2 separate plans. One is to help homeowners refinance their homes and the other to encourage existing homeowners (with financial difficulties) to make their mortgage payments.
Here are more details:
The refinancing program
- To refinance, the value of a home has to have slipped below the 20% equity required by standard home loans – but not so far that it is deep “underwater.”
For instance, if you bought a $400,000 home with a traditional 20% down payment and took out a $320,000 mortgage, you could refinance with federal help if your home is now valued at under $400,000. In that case, the loan would be worth more than 80% of the home’s value.
But, you’re blocked out of the program if the house’s value has fallen so low that the mortgage is worth 105% or more of the home itself. In this example, with a $320,000 mortgage, that would be a home value that has dropped to $304,000 or lower. So if the market value of your home is between 80% and 105% of your mortgage, you can qualify.
- After that, you have to prove to your lender that you can still afford the new mortgage.
The loan modification program
If your home is deep underwater, or you’re in danger of foreclosure and you have fallen on hard times, this is the program for you. Its basic requirements:
- The unpaid balance on the first mortgage must be under $729,750 for single-family units. Limits are higher for two- to four-family homes.
- The loan must be originated before this year.
- The borrowers’ housing costs must exceed 31% of their income.
- Borrowers must have suffered a “significant” change in income or expenses, such as losing a job, falling ill or seeing their mortgage interest rate skyrocket.
The goal is to get housing costs down to 31% of income. If someone qualifies, the feds sweeten the deal by paying down up to $5,000 in principal over five years to encourage the borrower to meet their payments.
So it looks like the government has come in to save the day (or at least try)! The whole purpose of this bailout is to make sure that homeowners can keep making their payments thus helping keep financial institutions above water. If financial institutions can stay afloat, then they can keep lending thus helping free up credit.
All we can do now is wait and see if the new initiative will make a difference.
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