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President Obama and the Treasury Department this week unveiled a much anticipated foreclosure prevention plan that will rely heavily on mortgage financiers Fannie Mae and Freddie Mac to assist at-risk borrowers.
The new "Homeowner Affordability and Stability Plan" is designed to attack the rising foreclosure problem on a number of different fronts, depending upon the borrower's situation, while providing incentives to participating homeowners, lenders, and mortgage servicers.
For those looking to refinance, that have Fannie and Freddie owned or guaranteed loans, but are unable to do so because their loan-to-value exceeds 80 percent, lending guidelines will be eased to facilitate such interest rate reduction refinances (in some instances lending up to 105% of current property value).
This measure alone is expected to help between four and five million homeowners obtain more affordable and sustainable housing payments.
To ensure the government-sponsored entities are able to continue to support the mortgage market, the Treasury will provide up to $200 billion in capital to the pair via preferred stock purchases.
It is, also, reported that the Treasury will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities in an effort to keep interest rates low and improve liquidity in the secondary market.
Under the agreement, the GSEs' (Government Sponsored Enterprises), retained mortgage portfolios will be increased by $50 billion to $900 billion - allowing Fannie/Freddie to hold additional mortgage notes.
Another three to four million homeowners will receive assistance through a $75 billion "Homeowner Stability Initiative."
This initiative would allow borrowers to receive loan modifications that lower the housing debt-to-income ratio to 31 percent, via both voluntary lender reductions and government subsidies.
In some cases, government-sponsored modifications would provide below-market interest rates for five years, after which they would adjust upward at a moderate pace until reaching the average rate for a conforming loan during the time of the modification.
The "Homeowner Stability Initiative" will work like this: once a modification is complete, borrowers that have paid their mortgage on time (for each 12 month consecutive period) will receive $1,000 per year, for up to five years, in incentive pay that will be applied toward the principal balance of the mortgage.
On the Lender/Loan servicers side: they will receive an upfront fee of $1,000 for each completed loan modification, as well as incentives of up to $1,000 each year for three years if they have enabled the borrower to stay current on the new loan.
Additionally, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before a borrower becomes delinquent.
Additionally, lenders will be encouraged to modify loans thanks to a partial guarantee program, which would create an insurance fund at a size of up to $10 billion.
According to the Treasury website: "Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index".
Within the next two weeks the Treasury will develop uniform guidelines for the loan modifications, which will be used for the Administration's new foreclosure prevention plan, and will be mirrored mandatorily by lenders participating in government aid programs.
Other measures to reduce foreclosures include; principal balance reductions during bankruptcy, or as the outcome of bankruptcy (i.e. the so-called "Cram Down"), and $2 billion in neighborhood stabilization funds, and improved flexibility of ‘Hope for Homeowners and other FHA loan programs.
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