This suspense is terrible. I hope it will last.

Oscar Wilde

I’m not late in my payments, how can I benefit from Obama’s stimulus bill?

Monday lunch time , March 2, 2009.

For those that are in deep waters, facing foreclosure or bankruptcy, check these recommendations, then come back.

For the rest, if you feel that the weight of your iron-debt-ball is getting to heavy, consider applying for a loan modification or to refinance your mortgage —just make sure you do it with the mortgage servicer of your debt — not the collector, nor the collection agency, nor any scam you may be offered out there. You’ll find the name and telephone number of your loan servicer in your monthly mortgage payment coupon book.

In short, the bill has a three pronged approach to make your mortgage payments on your primary residence more affordable:

  • If you’re suffering from reduced income, it encourages the lender to bring your monthly payments down to a 31% of your income before taxes.
  • Also, if you’re feeling the pain due to loss of house value, or having difficulties in meeting the usual 20% equity requirement to refinance your mortgage, lenders will refinance your loan as long as the debt does not exceed 105% of the market value of the property —that’s 25% over the usual 80% cap.
  • Finally, the program gives you incentives to stay current on your debt: up to $1,000 yearly for up to 5 years. The lender also gets a $500 incentive to keep you current.

Let’s illustrate this plan with a couple of examples from the Support at Homeowner Affordability and Stability Plan:

Family A: Access to Refinancing

In 2006, Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

Today, Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000.

Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing.

Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.

Existing Mortgage Refinancing
Balance $199,584 $203,575
Remaining Years 27 30
Interest Rate 6.50% 5.16%
Monthly Payment $1,308 $1,113
Savings $196 per month, $2,347 per year

Family C: Eligible for Homeowner Stability Initiative

In 2006, Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker – Mom & Pop Mortgage – sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.

Today, Family C has $214,016 remaining on their mortgage but their home value has fallen -18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.

Their loan is now 113% the value of their home, making them “underwater” and unable to sell their house.

Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.

Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.

Existing Mortgage Loan Modification
Balance $213,431 $213,431
Remaining Years 27 27
Interest Rate 7.50% 4.42%%
Monthly Payment $1,538 $1,132
Savings $406 per month, $4,870 per year

Once you call your lender, he will ask you to fill and fax a Financial Statement form, fill it at their website, or ask you directly on the telephone for all your income and expense data, as well, as the market value of your home —you can use your property’s tax bill value.

Before you make the call, I suggest you gather all your bills and sources of income, and write them down —take advantage of the Budget section, that’s what it’s for. Then, do a little number crunching to get a feel of where you stand. Have in mind, that you also have to be capable of paying the new loan. In any case, you’ll be needing these documents later on to support your request.

Update, March 4: Federal officials clarified the definition of who is “at risk,” defining it as those: suffering serious hardships, declines in income or increase in expenses; facing an interest rate hike; having high mortgage debt compared to income; owing more than their house is worth, or demonstrating other reasons for being close to default.

To participate in the loan modification plan, borrowers must:

  • have obtained their mortgage before Jan. 1, 2009;
  • have a primary mortgage of less than $729,500;
  • live in the property;
  • fully document their income by providing tax returns and pay stubs;
  • sign a statement of financial hardship; and
  • go for counseling if their total household debt—including auto loans, credit cards and alimony—totals more than 55% of their income.

The modification program will be in effect until the end of 2012, but loans can only be adjusted once.


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