The Making Home Affordable Programme by the Obama administration has been launched to help foreclosure victims. It has two segments – refinancing and loan modification. There are certain conditions attached.
For those seeking loan refinancing the borrower has to be current on mortgage payments and have at least 20% equity on the property. This means that the worth of the house must be something over and above the loan amount still due. Also the loan has to be covered by Fannie Mae and Freddie Mac, the borrower has to be an occupant with good credit credentials. The refinancing will only reduce the interest to current low levels but not bring down the loan amount.
The loan modification measure will help those who are defaulting and even gone underwater. Even those with low credit history will not be refused. It will even apply to loans that are not under the umbrella of Freddie Mac and Fannie Mae and also to second mortgages. The only condition is that the servicers must agree to participate.
There are also some other eligibility conditions. The house has to be the primary residence, the due amount should be less than $729,750 and the monthly payments must not be more than 31% of the pre-tax earnings of the borrower. These conditions ensure that the borrower will be able to continue with the mortgage and default again.
Once the borrower passes all these tests the lender will first decrease the monthly remittances to 38% of the pre-tax income of the borrower. This will be done by lowering interest rates and or lengthening term of loan and may be by reducing principal amount. The government would compensate the lender for half the losses incurred by this reduction. If the borrower runs through 90 days of the trial period with the modification then the servicer will be rewarded by the government. The borrower and lender too would also be given carrots as reward.
The interest rates will not start climbing till 5 years. The acceleration speed would not be more than 1% point annually in relation to what the market rate of interest was at the time of loan contract. From then on the interest rate will not increase beyond this point till the end of the loan term.
It is expected that the two branches of Making Home Affordable will benefit nearly 9 million borrowers.
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