Obama's mortgage relief program growing

September 9, 2009 - The Obama administration's $50 billion mortgage relief program is finally picking up speed after a sluggish and disappointing start: Nearly early one in five eligible homeowners have been offered help so far.

The "Making Home Affordable" plan was launched with great fanfare in March. As of last month, lenders had sent out more than 571,000 offers to reduce borrowers' monthly payments, the Treasury Department said Wednesday.

That's 19 percent of the nearly 3 million homeowners eligible for a loan modification under the plan, up from 15 percent at the end of July.

"There are signs the plan is working," said Michael Barr, assistant Treasury secretary for financial institutions. "But we can do better."

Much better, lawmakers and housing counselors say.

"We think that you're missing the mark," Rep. Maxine Waters, D-Calif., told a panel of mortgage industry executives at a House hearing Wednesday.

Of the modifications offered, about 360,000 borrowers, or 12 percent, have signed up for three-month trial modifications, which are supposed to be extended for five years if the homeowners make their payments on time.

To increase pressure on the industry, Waters and other lawmakers threatened to revive a failed proposal, opposed by banking lobbyists, to let bankruptcy judges rewrite the terms of a mortgage.

That change is necessary, consumer groups say, because getting a lender to do so voluntarily is still a time-consuming, bureaucratic nightmare. Many lenders are still scheduling foreclosure sales, and charging borrowers fees for participating in the Obama plan.

"The administration has got to put some teeth in this and really get some consequences for the lenders and servicers who are not cooperating," said Bonnie Mathias, a board member of the Association of Community Organizations for Reform Now, or ACORN.

But mortgage executives say they are racing to implement the program, hiring thousands of workers to handle an unprecedented flood of calls.

"We fully understand the urgency," Jack Shackett, Bank of America's head of credit loss prevention, told lawmakers. "We understand that we have a long way to go under very challenging circumstances."

Bank of America has doubled its number of trial modifications in two months to nearly 60,000. But it still lags its competitors, having enrolled about 7 percent of its 836,000 eligible loans, compared with 25 percent for JPMorgan Chase & Co.

The Treasury Department's decision to publish those numbers has clearly provided a powerful inventive for many in the industry.

Lenders are "concerned about the report card showing them in a worse light than their peers," said David Stevens, an assistant secretary at the Department of Housing and Urban Development. "Nobody wants to be a low performer on that score card."

Industry executives also say they are planning to work with Obama administration officials on a possible extension of the program to unemployed homeowners. Also under consideration is finding a way to help borrowers with "pick-a-payment" or option ARM loans, which gave borrowers the ability to defer some of their interest payments and add them to the principal.

Treasury says 48 mortgage companies are now involved in the program, up from 38 in July. The companies have requested financial information from almost two-thirds of eligible borrowers and say they are on track to have 500,000 loan modifications in place by Nov. 1.

The program is voluntary, relying on subsidies to encourage mortgage companies to participate. Lenders must agree to reduce the loan payments to 38 percent of a borrower's monthly pretax income. After that, the government and lender split the cost of bringing the payment down to 31 percent.

Borrowers can receive rates as low as 2 percent for five years. Eligible borrowers have to provide their most recent tax return and two pay stubs, as well as an "affidavit of financial hardship" to qualify.

But some borrowers are in such dire financial shape that they don't know if getting a modification will be the magic bullet.

Steve Rudolf, 62, a talent agent in Tampa, Fla., has managed to get a modification on his $124,000 home equity line, but has had no luck with his primary mortgage. While he has yet to miss a payment, his savings have nearly run out.

"Some of this I brought on myself," through bad investments, Rudolf said. "But I didn't know that the world's worst economic crisis for housing was going to happen."

Ambitious Foreclosure Plan Revealed - How Will It Help?

The Obama administration on Wednesday detailed its ambitious $275 billion plan to halt soaring foreclosures nationwide, outlining the financial incentives it’s offering investors, lenders and their bill collectors to lure them into modifying distressed mortgages to keep Americans in their homes. The slump in home prices is the root cause of the global financial meltdown, so the success or failure of the administration’s housing plan is vital to ending the deepening economic recession.

Shortly before financial markets opened, the Treasury Department provided its long-awaited update to the Making Home Affordable program, which the administration thinks can help up to 9 million homeowners.

“It’s a major break with the past because it really takes up a multifaceted approach. It used several different carrots and a stick to come at a comprehensive plan to reduce the number of foreclosures,” said Kathleen Day, a spokeswoman for the advocacy group Center for Responsible Lending in Durham, N.C. “That’s the only way you’re going to stabilize the financial system.”

The plan’s details came out a day before the House of Representatives is expected to pass compromise legislation giving bankruptcy judges power that they now lack to modify the terms of certain mortgages. Bankruptcy changes are the stick to go along with the carrots-new financial incentives for lenders to modify mortgages instead of moving to foreclosure.

The Obama housing plan attacks two problems that are creating a vicious cycle in the nation’s housing market.

First, it offers $200 billion to provide refinancing for some homeowners who owe more than their homes are now worth-shorthanded as being “underwater” on their mortgages. To qualify, these homeowners-5 million of them by administration estimates-must have their mortgages in the hands of Fannie Mae or Freddie Mac, the mortgage finance giants that the government seized last September.

“We have been advocating for one unified approach to help modify or refinance delinquent and underwater loans and thus we think this program will undoubtedly help servicers keep more at-risk borrowers in their homes, which is a crucial step to helping stabilize the mortgage and housing markets,” stated John A. Courson, president and CEO of the Mortgage Bankers Association (MBA).

Many of these homeowners would like to take advantage of today’s historically low interest rates and refinance but can’t, since the law prohibits refinancing if the current mortgages reflects less than 80% of the homes’ values. These homeowners now can seek to refinance if their mortgages are up to 5% higher than the present-day values of their homes. That helps some, but it won’t reach lots of homeowners in California, Florida and elsewhere whose homes are now worth substantially less than their mortgages.

Because most mortgages are bundled into securities and sold into a secondary market, it’s often difficult for homeowners to find out whether Fannie or Freddie owns their loans or whether they’ve been pooled with other loans and sold by an investment bank to other investors.

The other pillar of Obama’s plan attacks the problem of affordability. The administration provides another $75 billion in incentives to help prevent foreclosures in cases in which the homeowners, up to 4 million of them, are about to lose their homes. The money comes from the $700 billion bailout fund approved last October.

Under this complex portion of the plan, the president offers a stream of financial incentives to mortgage servicers, who are essentially bill collectors for private investors who own pools of U.S. mortgages. Some incentives stay with the servicers while others flow through to investors.

In exchange for the incentives, a servicer would modify a mortgage so that no more than 38% of a homeowner’s monthly after-tax income was taken by the monthly mortgage payment. The government then would step in and share the cost of reworking that mortgage so that no more than 31% of the borrower’s monthly income was tied up in the payment.

This could result in some mortgages carrying interest rates as low as 2% for five years. Critics think that this mortgage subsidy interferes with the natural process of letting the marketplace find the floor on home prices.

“Not only do these gimmicks prevent home prices from falling to the market-clearing levels that would give private lenders the confidence to loan, but the continued specter of subsequent government-mandated modification will keep lenders out of the game,” said Peter Schiff, the president of investment strategist Euro Pacific Capital.

Treasury Secretary Timothy Geithner told lawmakers Wednesday that the administration plan offers “a powerful set of incentives” and “persuasive force and some economic inducements to provide substantial improvements in affordability. With those changes you will be put in an economically viable position and stay in your home.”

Although lenders have worked over the past year to freeze mortgage rates that were about to adjust to higher monthly payments, few have been willing to take losses and significantly rework the loan terms. This has led to a high percentage of re-defaults on modified mortgages and avoided tackling the problem of affordability.

Federal Deposit Insurance Corp. Chairman Sheila Bair pushed unsuccessfully during the Bush administration to rework loans with an eye toward affordability, and the Obama administration is implementing her ideas.

Any lender that takes new taxpayer bailout money under the administration’s Financial Stability Plan will be required to participate. The Obama team also is betting that requiring a standard guideline for mortgage modification will provide more protection to mortgage servicers, who are bound by contract to investors, not homeowners, and can be sued if they modify mortgages.

The Obama plan got a strong endorsement Wednesday from the Financial Services Roundtable, which represents many of the largest mortgage lenders.

“Our member companies intend to implement the program for all at-risk borrowers consistent with program guidelines and contractual requirements,” the group said in a statement. “For the benefit of at-risk borrowers who are facing the loss of their homes, for communities and for our nation in this time of extraordinary economic challenges, it is imperative that investors and servicers that choose to participate in the program adopt a national standard model.”

In an administration background briefing that was conducted under the administration’s insistence on anonymity in order to speak freely, it was clear that the plan is far from a panacea.

Senior government and industry officials confirmed that homeowners who seek to refinance to the new low interest rates will have to foot the bill for a range of new fees that Fannie and Freddie require. It’s not clear whether these will have to be paid upfront or can be folded into the loans.

The officials also confirmed that there’s no standard procedure for lenders under the Fannie and Freddie portion of the plan. It will be up to each lender to determine whether the refinances go through them or whether mortgage brokers and other intermediaries can help homeowners seek refinanced loans under the program.

Officials were also careful to note that mortgage servicers won’t be able to modify mortgages if the terms of their contracts with the investors who own the pools of mortgages don’t allow it. That leaves matters at square one for many homeowners, since many investors, like lenders, have been reluctant to take losses in hopes of an eventual government bailout.

Officials confirmed that they have no reliable data on how many of these investors are on the other ends of contracts that prohibit mortgage modifications. That question is important, since many of the weakest loans underwritten during the height of the housing boom, from 2004 to 2006, were sold by now-defunct investment banks to investors abroad, many in Europe.

These pools of mortgages, called mortgage-backed securities, are the so-called toxic assets that are at the heart of the global banking meltdown. This unresolved question about their contract terms is relevant to recovery in housing and the financial sector.

So, who qualifies for help of what kind? Here are some answers for consumers:

Q: How do I know if I qualify?

A: Your mortgage must predate the start of 2009, you must live in the home and you’ll have to provide proof of income. Then ask two questions. First, are you already behind on payments or even in the foreclosure process? If the answer is no, then ask yourself whether your current mortgage rate is high enough to make it worth your while to refinance to take advantage of today’s low rates for 15-year and 30-year fixed-rate mortgages.

Q: That’s it?

A: No. If you think it’s advantageous to refinance, you must find out who owns your loan. Most mortgages are bundled together and sold into a secondary market, where investors technically own them. If Fannie Mae or Freddie Mac placed your loan into the secondary market, you can contact the company that sends your monthly mortgage statement to discuss the new program. If your mortgage is in the portion of the secondary market where the private sector issued the mortgage-backed securities, you don’t qualify.

Q: How do I know who owns my loan?

A: You’ll have to ask the company that sends your monthly statement. These companies are sure to be swamped with calls this week, so be patient. And be warned: Borrowers have found in the past that mortgage-bill collectors-called servicers-often are less than forthcoming with answers as to who owns the loans.

Q: What if my loan is owned by Fannie or Freddie but I have negative equity?

A: You’re not alone. Researcher First American CoreLogic reported Wednesday that one in five homeowners nationwide now owes more than his or her home is worth. To qualify under the refinance portion of the Obama plan, you can owe up to 5% more than your home is now worth. Thus, many homeowners in California, Florida, Arizona and Nevada, where home prices have plunged, won’t qualify.

Homeowners in 250 high-cost U.S. counties can seek help under either track, however, provided that they qualify, even if the mortgage is worth up to $729,750. This could help high-income homeowners in Middle America and the Northeast, where home prices haven’t fallen as much.

Q: What about those of us who are about to lose our homes?

A: A lot will depend on whether the mortgage bill collectors, the servicers, think that they have leeway from investors to modify the loans. They’re being offered an upfront fee of $1,000 and will get “pay for success” fees for three years if a borrower’s modified loan remains in good standing. They’re being offered even more fees if they get homeowners into this program before they fall behind on payments.

Q: What happens if the servicer agrees to modify my mortgage?

A: First, the servicer has to get your monthly payment down to 38% of your monthly after-tax income. It can do this by taking a loss on the loan or stretching a 30-year loan into a 40-year, for example. It’s allowed to reduce interest rates as low as 2%.

Once the 38% threshold is met, the government matches lenders dollar for dollar to get the payment even lower, to 31% of monthly after-tax income.

This percentage is calculated on the value of a first-lien mortgage. If a home carries a second lien-often called a second, or junior, lien-the servicer will get another $250 if it extinguishes the second mortgage.

Q: Is the modification a permanent fix?

A: The new interest rate would be valid for five years. Afterward, it can rise 1% a year until the lending rate hits the conforming loan survey rate at the time of the modification. Given that mortgage rates today are low by historical standards, the loan survey rate is likely to be well below the punishing adjustable rates that are at the heart of many distressed mortgages.

Q: Do lenders have to participate in Making Home Affordable?

A: If they’re getting Wall Street bailout money and hope to get any more, then they have to play ball. Many mortgage servicers are outside this realm, however, and their trade group, the American Securitization Forum, gave only lukewarm, qualified support to the Obama administration’s plan.

Q: Is there any way to force servicers to help homeowners?

A: The House of Representatives is expected to pass legislation this week that would allow bankruptcy judges to modify mortgages. This measure, which seems to have support in the Senate, too, would let judges shave off of mortgages the difference between what homeowners owe and what their homes are now worth. This would give homeowners some leverage in negotiations.

Q: But don’t these homeowners deserve what they get for overextending themselves?

A: Some think so. There are two parties to a bad deal, however-people who bought too much home and lenders who let their underwriting standards fail in lending to them. Somebody has to lose. The Obama administration is betting that keeping owners in their homes helps set a floor under prices. Critics think that only the marketplace can find a floor for home prices.

DTI Ratios: What Homeowners Need to Know

Ask homeowners about their DTI (debt-to-income) ratios, and they’re likely to respond with something like, “My what ratios?!” However, when distressed homeowners are sizing up their foreclosure options, they need to brush up on DTI ratios. Lenders will be scrutinizing these ratios to determine homeowner eligibility for loan modification and other debt relief.

Homeowners need to know that their DTI ratios are crucial to determining an affordable house payment. The current government plan defines an affordable house payment as one that is no higher than 31% of the homeowner’s front-end DTI. In other words, the house payment or PITIA (principal, interest, taxes, insurance, and any association fees) on the first mortgage cannot exceed 31% of the household’s gross monthly income.

Encourage homeowners to examine both their front-end and back-end DTI ratios:

Front-end DTI ratio is based solely on the house payment. (Under the current government plan, the front-end DTI target of 31% accounts only for the first mortgage. If the home has other liens against it, such as a second mortgage or home equity line of credit, those are accounted for separately as part of the back-end DTI.)

Back-end DTI ratio is based on all monthly debt payments combined, including the house payment, credit card payments, payments on auto loans, and other loan payments.

Calculating the Front-End DTI Ratio

Although the formulas for calculating DTI ratios are simple, homeowners are unlikely to have encountered them in the past. To calculate their front-end DTI, instruct homeowners to divide their house payment by their monthly household income (gross income):

House Payment / Gross Monthly Household Income = Front-End DTI Ratio

This is easy, assuming the monthly house payment includes an amount held in escrow to pay the property taxes, homeowner’s insurance, and any association fees. Such a payment is often referred to as PITIA (principal, interest, taxes, insurance, and association fees).

If they pay property taxes, insurance, and association fees separately, then they have to perform an extra step. Instruct them to total these additional annual expenses, divide by 12 months, and add the result to their monthly house payment (principal and interest). They can then divide the resulting house payment by their monthly household income to determine their front-end DTI ratio.

Private mortgage insurance (PMI) payments fall outside this calculation under the current government plan. 

Calculating the Back-End DTI Ratio

To calculate the back-end DTI ratio, instruct homeowners to total their monthly debt payments, including: House payment or PITIA, as discussed in the previous section; Any payments on second mortgages, home-equity loans, or home-equity lines of credit; credit card payments; auto loan or lease payments; alimony and other payments on credit accounts or loans.

Now, they should divide their total monthly debt payments by their total gross monthly household income:

Monthly Debt Payments / Gross Monthly Household Income = Back-End DTI Ratio

Exploring DTI Ratios under Obama’s Foreclosure Prevention Plan

The Home Affordable Modification Program accounts for both front-end and back-end DTI ratios. When attempting to reach the 31% target for the front-end DTI, the focus is only on the first mortgage:

For qualifying homeowners, the lender will have to first reduce payments on the first mortgage to no greater than a 38% front-end DTI ratio. Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31% front-end DTI ratio.

Borrowers who qualify for a modification but would have a post-modification back-end DTI ratio greater than or equal to 55%, will be provided with a letter stating that they are required to work with a HUD-approved counselor. The modification will not take effect until they provide a signed statement indicating that they will obtain counseling.

Keep in mind that only lenders, investors, and servicers who choose to participate in this program are bound by its guidelines and that the guidelines may change over time. Different lenders may have their own DTI ratio targets and limitations.

When homeowners in your market are in default or in danger of default, encourage them to explore their options. Now that they can calculate their DTI ratios, they have one more tool that will empower them to assess their options, keep their house, and preserve their American Dream of homeownership.

Ralph R. Roberts is a consumer advocate, spokesperson for Federal Loan Modification Law Center host of keepmyhouse.com, and author of numerous books, including Foreclosure Self-Defense For Dummies and Loan Modification For Dummies (Summer, 2009). Ralph is based in Sterling Heights, Michigan and can be reached at