Stimulus Plan Aims To Help Struggling Homeowners

According to the latest figures, approximately one in 10 mortgages is either delinquent or in foreclosure. Housing analysts estimate that without government help, close to six million homeowners could lose their homes to foreclosure in the next three years.

In an attempt to help these struggling homeowners, President Obama’s administration recently announced the $275 billion Homeowner Affordability and Stability Plan. The new program is expected to help close to nine million borrowers and homeowners in 2009 and beyond.

Although a few of the details are still being worked on, the plan has a two-pronged approach: 1) to help homeowners with little equity in their homes, and 2) to help homeowners who are struggling to keep up on their mortgage payments.

For borrowers with mortgages owned or guaranteed by Fannie Mae or Freddie Mac and who are making their payments on time—but are unable to refinance due to low equity—the new plan allows many of these borrowers to refinance to a lower interest rate. Borrowers with up to 105 percent loan-to-value ratio can qualify for this program. Fannie Mae and Freddie Mac have also agreed to refinance loans for as large as $729,750 and to include principle residences, second homes and some rental properties in this refinancing plan. According to the administration, the refinancing plan is expected to help 4-5 million homeowners to refinance.

For homeowners who are struggling to make their mortgage payments, $75 billion will be set aside to help reduce these “at-risk” homeowners' monthly payments. Most of the funding will be in the form of incentives to lenders to modify existing first mortgages. The program’s goal is to bring payments down to no more than 31 percent of an at-risk borrower’s income. This part of the plan could help four million homeowners who are in danger of falling behind on their mortgage payments, currently behind in their mortgage payments, or facing imminent foreclosure.

The plan includes other provisions that specifically target renters displaced by foreclosure and military families/homeowners who are having difficulties making mortgage payments. Under the guidelines of the program, two separate funds totaling $3.5 billion will be created to help renters and the military. Also, the program lays out uniform standards for loan modifications across the mortgage industry.

Will the Homeowner Affordability and Stability Plan work? At this point, it’s difficult to predict. However, taking into account the record-low interest rates we’re now seeing, the future does seem a lot brighter for millions of struggling homeowners. ∆

Sources: Economics Weekly, White House Press Office