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Multiple Programs for Modifying Mortgages
Homeowners in financial distress who are investigating the possibility of modifying an existing mortgage may have more options than they realize. Here's a quick summary of the major initiatives to date that are aimed at helping homeowners find a way to stay in their homes:
Fannie Mae/Freddie Mac Mortgages
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has established guidelines for reworking mortgages that are owned or guaranteed by the two government-sponsored enterprises. The guidelines are somewhat similar to the program developed by the Federal Deposit Insurance Corporation (FDIC) to manage IndyMac mortgages after the bank was taken over by the FDIC earlier this year.
Fannie and Freddie own or guarantee almost 31 million mortgages--roughly 58 percent of all single-family mortgages, according to the FHFA. The program is designed to set an industry standard for modifying private label mortgages and mortgage-backed securities and streamline the modification process.
The program, announced November 11, 2008, and currently scheduled to begin December 15, 2008, is designed to help modify loans so that mortgage payments, including homeowner association dues, represent no more than 38 percent of the household's monthly gross income. Options for modification include: reducing the interest rate, extending the term of the loan, deferring payment on part of the principal, or some combination. Mortgage servicers will receive $800 for each loan modified through the program.
The program is aimed at borrowers who (1) own and live in their homes, (2) are at least three months behind in making mortgage payments, and (3) are not in bankruptcy proceedings. Borrowers who are defaulting because of financial mismanagement or simply being overextended will be encouraged to get financial counseling through agencies approved by the Department of Housing and Urban Development (HUD).
HOPE for Homeowners
(H4H)
This program allows borrowers to refinance into a 30-year fixed-rate loan insured by the Federal Housing Administration (FHA). However, it is voluntary for the lender and depends on the lender being willing to take a loss by reducing the principal balance owed. The program was established in July 2008 as part of the Housing and Economic Recovery Act. The program was launched October 1, 2008, and is scheduled to run through September 2011.
A lender will make the final determination as to whether a borrower can participate in the program. However, borrowers may be eligible for H4H if they meet the following criteria:
l They are at risk of foreclosure on their primary residence, and they own no other residential property.
l Their mortgage must have originated before January 1, 2008, and they must have made at least six payments on it.
l Mortgage payments must either represent more than 31 percent of their income or be likely to do so because of a mortgage interest rate reset. A previous requirement that the refinanced mortgage can represent no more than 90 percent of the home's value has been eliminated.
l Loans may not exceed $550,440.
l They may not intentionally default on a mortgage.
l They also may not have been convicted of fraud under federal or state law within the last 10 years and have not provided materially false information to obtain the mortgage being refinanced, such as information about their income.
The program is authorized to insure up to $300 billion in mortgages, which it anticipates will allow it to assist 400,000 homeowners. A list of participating H4H lenders, updated regularly, is available at www.fha.gov.
Other possibilities
Some individual lenders have announced their own programs for modifying mortgages, generally those that are still held by the issuer. Each has its own criteria for which borrowers qualify for mortgage modification, how mortgages may be reworked, and whether the bank will impose a temporary moratorium on foreclosure proceedings for borrowers operating in good faith.
Modifications generally involve reducing monthly mortgage payments to some percentage of the household's monthly income. Stated figures so far have ranged from 31 percent to 40 percent. However, as noted above, the FHFA is encouraging mortgage lenders to adopt the new Fannie Mae/Freddie Mac standard of 38 percent.
According to the FHFA, private label mortgages represent less than 20 percent of mortgages but 60 percent of serious delinquencies.
The 360 Degrees of Financial Literacy Web site offers general information for managing personal finances and does not recommend specific financial actions. For financial advice tailored to your situation, please contact an expert such as a CPA or a personal financial advisor.