This morning, federal officials released details of the Obama $75 Billion loan modification and refinancing plan for foreclosure prevention. This plan follows the $8000 first-time homebuyer tax credit initiative unveiled in late February.
It is clear is that the Obama administration is dead serious about allocating financial resources (and taxpayer money) to stimulate the economy through investment in finance, banking, and home-ownership. Because these subsets of our economy are to a large degree interdependent, it is imperative to stabilize all of these sectors simultaneously to effectively begin to stem losses and boost confidence.
Will these initiatives serve as a catalyst for growth? Will they serve as an intermediary? A stop-gap measure? Is $75 Billion a sufficient amount to even make an impact? At this early juncture, the jury is still out—only time will allow us to accurately benchmark the effectiveness of these programs.
The underlying premise of these initiatives, at least for housing, is sound: Stabilize home prices by slowing (and hopefully eliminating) the rate of foreclosure, while stimulating growth in housing by incenting first-time homebuyers to take the correct steps toward home-ownership. We have been in a down-cycle of Real Estate for almost 4 years. Nothing stays down forever, but what has put the brakes on homeownership and new investment in Real Estate has been the continued downward trending of home values.
While prices have already begun to stabilize in a lot of local markets, there are still others where it is unclear when the softening of home values will firm up and begin to rebound. Much of this uncertainty is due to the rates of foreclosure in certain pockets of our area (and nation). If this $75 Billion plan is effective, the hope is that it should stem the tide of foreclosures, allow prices to stabilize and eventually rebound—which in turn will entice many of the first-time buyers to move forward and invest in Real Estate.
There are 2 major subsets of homeowners this plan affects (roughly 9 million homeowners total):
- Homeowners who have missed payments and whose monthly mortgage payment is disproportionate to their income (roughly 4 million Homeowners fall in this category). This plan will work to reign in their monthly payments to no more than 31% of their gross income.
- Homeowners who have not missed a payment but have little or no equity (Roughly 5 million homeowners). This plan will allow these homeowners to refinance into lower-cost loans.
The eligibility criteria and program guidelines for loan modifications are as follows:
- Homeowner(s) must have obtained their mortgage prior to Jan 1, 2009
- Homeowner(s) must have a primary mortgage of less than $729,500
- Homeowner(s) must live in the property
- Homeowner(s) must fully document income through tax returns and pay stubs
- Homeowner(s) must sign a statement of financial hardship
- Homeowner(s) must go for financial counseling if their household debt (including auto loans, credit cards, alimony etc.) totals more than 55% of their income
- The program will be in effect until 2012, however, loans may only be adjusted once
This plan is very different than the first loan modification that was implemented in 2008; the previous program had a loan re-default rate hovering around 50% after 6 months—rendering the first plan essentially ineffective. However, this plan was loosely structured and relatively unregulated. The intention of the new $75 Billion plan is to include provisions for governance and regulation, but again, only time will allow us to truly benchmark its effectiveness.
This plan does provide hope for millions of Americans in need. If implemented effectively, these aggressive actions can serve as a catalyst for the housing market and overall economy.
This post written by Amit Kulkarni, Director of Marketing & Technology at Avery-Hess, Realtors.
Search for Homes: www.averyhess.com