First Step in Housing Refinance Plan Is Reaching Loan Servicer

Homeowners seeking help from the Obama administration’s foreclosure-prevention plan should start by contacting their bank, a process that’s likely to involve multiple phone calls and hours of effort.
By: Jeff Plungis: Bloomberg.com
“Servicers are inundated right now,” said Gibran Nicholas, chairman of the CMPS Institute in Ann Arbor, Michigan. “You have to be patient.”

Mortgage payments may be reduced to 31 percent of gross monthly income under the Obama plan. Applicants will have to produce pay stubs and tax returns to document income, the Treasury Department said today. They’ll also need to sign an affidavit confirming financial hardship.

Loans must have been made before Jan. 1, 2009 with a balance of less than $729,750, and the property must be a primary residence to qualify. The program doesn’t apply to second homes or vacation homes. Loans can be modified only once under the program.

The administration estimates between 7 million and 9 million homeowners may be eligible for help. The two main groups are people who can’t currently refinance to lower rates and those who may be on the verge of foreclosure because of economic distress.

About 4 million to 5 million homeowners are current on their loans but aren’t able to take advantage of current low mortgage rates because their homes have lost value, the administration said. Homeowners generally aren’t able to get a new mortgage greater than 80 percent of their home’s value. With this voluntary program, that requirement will be waived. Loans up to 105 percent of the value of the home will be eligible.

Saving $2,300

In one example of a borrower refinancing from a 6.5 percent loan to a 5.16 percent loan on a $200,000 mortgage, the new program would save more than $2,300 per year, according to the Treasury Department.

The refinancing program only applies to loans owned by Fannie Mae or Freddie Mac. Determining if that’s the case is another big challenge for borrowers, said Nicholas of the CMPS Institute. The information usually isn’t disclosed in monthly mortgage statements or the papers received at closing.

Getting through to a loan-servicing company by phone is one option. Loan companies must respond to written requests by law, but that can take up to 60 days, Nicholas said. Fannie Mae has a link on its Web site offering to check if a borrower fills out an online form.

Modified Mortgages

The administration estimates 3 million to 4 million homeowners in economic distress may avoid foreclosure with modified mortgages. The guidelines released today distribute the cost of the new loans among the borrower, the lender and the government.

Lenders will be responsible for bringing down the monthly payment to no more than 38 percent of a borrower’s gross monthly income, the administration said. Further reductions in interest payments, down to 31 percent, will be matched dollar-for-dollar by the government and paid directly to the loan servicer.

The loan company will be able to reduce the interest rate to as little as 2 percent to achieve the debt-to-income ratio and can also extend the loan term to as long as 40 years.

Homeowners would be credited an extra $1,000 in reduced principal each year for five years as an incentive to stay current on payments. Lenders would be given $1,000 for each loan successfully modified and up to $1,000 each year for three years if the new loans stay current, according to the Treasury Department.

One difference from previous housing rescue plans is borrowers who haven’t missed payments are now eligible for help.

Seek Help

Consumers may want to obtain advice from a credit counselor before beginning the process, said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, an umbrella group of 850 U.S. community-based agencies.

The high rate of repeat foreclosures among borrowers who modified their loans under earlier foreclosure-prevention plans shows people aren’t always getting good advice. The foundation’s credit counselors are trained and certified, Cunningham said.

“If I was about to lose my home, I’d reach out for professional help,” Cunningham said. “Plan A, in everybody’s heart and mind, is to stay in the home. If long-term sustainability isn’t an option, then we need to exercise some tough love.”

The credit counseling foundation’s toll-free number is 1- 800-388-2227. Callers will be automatically routed to the counseling office nearest their home. Counseling agencies can also be located online at http://www.debtadvice.org.

The Hope Now alliance of banks, mortgage companies, investors and community groups offers advice on its Web site, hopenow.org, and links to 20 counseling groups certified by the U.S. Department of Housing and Urban Development, including the Association of Community Organizations for Reform Now, or ACORN, the Catholic Charities USA and the National Urban League.