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How the Obama plan will affect homeowners

Q&A

February 19, 2009|Maura Reynolds

WASHINGTON — Here are questions and answers about the foreclosure-prevention plan unveiled Wednesday by President Obama.

Who will benefit from this plan?

The plan is designed to help two kinds of homeowners. The first are people who took out prudent mortgages with a substantial down payment and have been making their payments, but who have little or no home equity because of falling housing prices. In the second group are borrowers who are struggling to make their monthly payments but would be able to make them if those payments were reduced.

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How does the refinancing program work?

Borrowers who have loans owned or guaranteed by Fannie Mae or Freddie Mac can apply to refinance them. If a borrower meets the program requirements, including that they occupy the home and can document their income, their lender may be able to offer a lower-interest-rate loan backed by Fannie Mae and Freddie Mac.

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What about people with "jumbo" mortgages?

The administration plan does nothing for people with mortgages that exceed the limits on so-called conforming loans that can be bought or acquired by Fannie Mae and Freddie Mac.

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How does the loan modification program work?

This program applies to borrowers who are unable to make -- or are struggling to make -- mortgage payments that exceed 38% of their monthly income. If the lender agrees to lower the interest rate or reduce the principal amount to bring the payment to 38% of the borrower's income, the government will pay half of the additional cost to the lender to reduce the payment to 31% of the borrower's income.

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Isn't this just rewarding people for making bad decisions and irresponsibly getting in over their heads?

The Obama administration says the loan modification plan will exclude speculators and borrowers with high debts. Homeowners must live in the house in question, document their income and demonstrate an ability to make the new payment for an extended period of time.

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How are these programs different from what was already available?

Unlike foreclosure-prevention efforts, both of the new programs are available to people who aren't yet behind on their payments. In fact, in the loan modification program, the government will pay mortgage servicers a higher incentive fee -- $1,500 instead of $1,000 -- if they modify a loan before a borrower goes into default.

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What if I'm already in foreclosure?

It is up to your lender to decide whether it wants to participate in the program. The Obama plan increases the financial incentives for lenders to participate.

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What if I file for bankruptcy protection?

Currently, bankruptcy law does not permit judges to modify the terms of mortgages for borrowers in bankruptcy. The Obama administration wants Congress to amend the law to give judges that power, but many lawmakers oppose the idea.

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How much will the Obama plan cost taxpayers?

The administration estimates the total cost at $75 billion. About $50 billion would come from financial-rescue funds that have already been approved by Congress and would be used to subsidize loan modifications. The administration estimates the refinancing program will cost Fannie Mae and Freddie Mac about $25 billion. Those funds are already in the budgets of the mortgage giants, which were taken over by the federal government last summer.

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When do the new programs take effect?

More details will be released March 4, but administration officials say the new programs will take effect immediately.

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maura.reynolds@latimes.com

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