In a sweeping new plan to help millions of “underwater” homeowners, President Obama today said borrowers can save $3,000 a year on average if Congress approves his program with a price tag of $5 billion to $10 billion.
Facing an already-divided Congress during an election year, the president emphasized that a previously-mandated fee on the largest financial institutions would offset the cost.
A proposal to help responsible borrowers who can’t otherwise qualify for refinancing into today’s historically low interest rates first surfaced during Obama’s state of the union address.
The Obama Administration has struggled with its numerous programs to rescue homeowners facing foreclosure and others designed to help those out of negative equity.
An estimated one-third of U.S. homeowners owe more on their mortgages than the value of their homes.
Borrowers with private mortgages – not those held or backed by Fannie Mae or Freddie Mac – would save about $3,000 a year by refinancing into current long-term rates, which are hovering at or below 4 percent.
The administration’s proposal would triple the incentives to private lenders to reduce the principal for underwater borrowers.
Currently, the owner of a loan that qualifies for the government’s Home Affordable Modification Program (HAMP) receives between 6 and 21 cents on the dollar to write down principal on that loan, depending on the degree of change in the loan-to-value ratio.
To increase the amount of principal that is written down, the Treasury would triple those incentives, paying from 18 to 63 cents on the dollar.
Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac will have access to streamlined refinancing through the two government-subsidized entities. Borrowers with standard non-Fannie or Freddie loans will have access to refinancing through the new program run by the Federal Housing Administration (FHA).
The administration estimates the cost of its refinancing plan to be in the range of $5 to $10 billion, “depending on exact parameters and take-up,” according to a White House statement.
This cost will be “fully offset” by using a portion of the President’s proposed Financial Crisis Responsibility Fee. The fee is part of the Dodd-Frank reform legislation enacted in 2010 and is to be imposed on the largest financial institutions, based on their size and the riskiness of their activities.
“This ensures that the program does not add a dime to the deficit,” the White House statement said.
Any borrower with a loan that is not currently guaranteed by Fannie or Freddie can qualify if they meet the following criteria:
- They are current on their mortgage: Borrowers will need to have been current on their loan for the past 6 months and have missed no more than one payment in the 6 months prior;
- They meet a minimum credit score. Borrowers must have a current FICO score of 580 to be eligible. Approximately 9 in 10 borrowers have a credit score adequate to meet that requirement;
- They have a loan that is no larger than the current FHA conforming loan limits in their area: Currently, FHA limits vary geographically with the median area home price – set at $271,050 in lowest cost areas and as high as $729,750 in the highest cost areas;
- The loan they are refinancing is for a single family, owner-occupied principal residence. This will ensure that the program is focused on responsible homeowners trying to stay in their homes.
Under the new plan, all underwater borrowers who decide to participate in either an existing government refinancing program or the new one through the FHA will have a choice to take the benefit of the reduced interest rate in the form of lower monthly payments – or they can apply that savings to rebuilding equity in their homes through a loan term of 20 years.
The shorter-term loan will give the majority of underwater borrowers the chance to get back above water within five years or less.
To encourage borrowers to make that decision, the administration is proposing that the legislation provide for Fannie and Freddie and the FHA to cover the closing costs of borrowers who chose this option – a benefit averaging about $3,000 per homeowner.
To be eligible, a participant in either program must agree to refinance into a loan with a no more than a 20-year term, with monthly payments roughly equal to those they make under their current loan.