The Homeowner Affordability and Stability Plan unveiled in February is a great start to getting millions of responsible borrowers into mortgages that they can afford. The plan addresses borrowers who either have less than 20% equity in their homes due to declining property values, or are employed but have had a recent decline in income.
The plan is actually two plans. The first part helps employed homeowners who have made their house payments on time and want to refinance to a lower interest rate, but are unable to do so under current lending guidelines.
Lenders will modify the terms of the loan, for five years, and forego some of the equity requirements that keep many borrowers from obtaining the lowest available rates.
This rate reduction will be funded by a combination of TARP funds, and by Fannie Mae and Freddie Mac, and would bring down mortgage payments to 31% of the gross income of the borrowers. The plan applies only to primary residences, excluding second homes and investment properties.
The second part of the plan addresses homeowners considered at-risk – perhaps from a decrease in income – and seeks to identify these borrowers before they default on their payments.
Issues that have been facing lenders since the implementation of the program include being able to handle the number of borrowers inquiring about the modification programs.
Issues facing borrowers include being severely upside down in their mortgages.
Borrowers who bought or refinanced a home at 100% equity several years ago and now have seen their property values fall 20% would either need to fund the difference to get them back to at least 105% or wait until the property appreciated in value.