Last week the website was put up for Obama's new Making Home Affordable plan. For many people, this could mean a way to save their homes. Which is wonderful. Truly. I've been close to homeless before and it's a scary prospect. It's an awful feeling to have a $10 water bill that you can't pay because you have $2.91 in your checking account and it has to last two weeks until payday. It's frustrating and scary and makes you feel like a failure. I know, believe me.
I also know that a lot of people could benefit from this new plan. The way the programs are structured (from what I can tell - it's early in the game yet) people are going to get a help up, not a handout. Well..for the most part.
There are two types of programs available right now. One is a refinance program for responsible homeowners. This program will help people who have a high interest rate or adjustable rate mortgages refinance into a fixed rate loan with a fairly low interest rate (last I checked mortgage rates were in the 5.5% range - though they may be less now).
For those of you who purchased your homes with a high interest rate or on an interest only product and can still afford your payments might benefit from this program. The purpose behind it is to get people out of "bad" loans and into a solid fixed rate loan with a low interest rate.
Right now many people can't refinance out of "bad" loans because they no longer have any equity in their homes. If the value of your house is currently less than what you owe on it a bank isn't going to lend on it. This program offers a chance for people in that situation a shot at a "good" loan.
The other program is called a loan modification. This is for people who have had a significant increase in their monthly mortgage payment due to an interest rate increase or a serious reduction in their income due to extenuating circumstances (loss of job, major illness, divorce, etc). For those who have fallen behind on payments or are struggling to keep them current, this program could save you from foreclosure.
Basically you'll need to prove your hardship at which time your lender will "modify" your loan. Generally this will mean lowering your interest rate so your payment goes down. According to the website, lenders have been authorized to adjust rates to as low as 2%. This isn't a permanent rate, it's only fixed for 5 years at which time you'll be reassessed or your interest rate will increase a percent a year until it reaches the agreed upon cap (when you sign up for this program the terms and conditions will be explained in full).
If lowering your interest rate still doesn't allow you to afford your mortgage payment, lenders have several other options available to them. The first is what's called a "Principle Forbearance" which basically just means they'll knock off part of your balance and hold it against you for later. (Don't think this is a handout, either. You will be required to pay this money back at a later date, though it will probably be held back without interest, which will help)
Example: If you have a $200,000 loan at 7% interest your monthly payment is going to be approximately $1300 ( not including taxes and insurance). If you knock $20,000 off that your new balance is $180,000. At 7% interest your new payment would be just over $1100. That's a savings of $200 a month. Now, if they do that AND give a rate reduction (no idea if they actually will or not - the website doesn't say) you could end up with a MUCH lower mortgage payment.
$180,000 @ 2% interest = about $650 a month, less than half of your original payment.
Of course your original balance of $200,000 @ 2% interest = just over $700 a month, still a significant savings.
This is, obviously, going to be a godsend for many people.
So why am I trying not to be bitter? Well, it's because we're the "good" borrowers in this case. We've lived within our means (for the most part) and have made our mortgage payments on time every month. Although we've had to tighten our belts quite a bit since I got laid off, we're still able to pay all of our bills and even have extra left over each month (once we got creative with our budget and made major cutbacks, that is).
Side Note: Yes, I realize how lucky we are. As I mentioned above, I've been on the verge of homeless before, and it's not fun. Especially when you have 2 children. If MM and I weren't together - if we hadn't of moved in together and gotten married when we did - I very likely would be homeless with two children right now. And that scares the shit out of me. :End Side Note
We did everything right - except for buying our house at the top of the market, that is. As it stands right now, we owe almost $200,000 more on our house than it's worth (and isn't hindsight a complete and total bitch?). Which makes me sick to my stomach if I think about it. So now we're in a tough position - we're stuck. We can't sell our house and we can't rent it out, because we couldn't get enough to cover our mortgage payment.
Those people who were irresponsible, who bought more than they could afford - or refinanced a billion times and took equity from their homes to pay for extras like motorcycles, boats, and other luxuries - are now eligible for the "modification" program. They might reduce their monthly payments by as much as HALF. While we'll still be making our regular payments, living in our house that isn't worth shit.
But that isn't even what bothers me. I know a lot of people are struggling for honest reasons, not just because they were living outside their means and got caught with their pants down.
What bothers me, what I just can't stomach, is the 3rd option available to those who are in foreclosure or having trouble making their mortgage payments:
Principal Balance Reduction
Do you know what that means? It means if the lender so chooses, they can reduce the principle balance of the loan - for good. Which means that $200,000 loan might get reduced down to $150,000. Granted, that is entirely up to their lender - but it's possible. For them. But not for me.
So yeah, I'm trying real hard not to be bitter.
For more information about the Making Home Affordable program, visit the website here. You can find out if you're eligible for either program on the site and read up about both of them.