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President Obama' s Making Home Affordable Program will attempt to assist homeowners refinance their up-side-down homes and encourage lenders to participate in loan modifications.

There are 3 steps to his plan...  
 
1. Assist responsible homeowners to refinance their undervalued homes.  

2. Help homeowners to modify their current mortgage in order to save it from foreclosure.
 
3. Support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

Today I will be discussing option 1!

I was thrilled when I learned that the Obama Team was looking into allowing residents refinance their homes to take advantage of the low interest rates, even if they are upside-down in their home (their mortgage is more than the value of their home). I patiently waited for loan guidelines to come out so I could see how folks in the Sacramento area could benefit from the plan.

The US Department of Treasury recently posted program preliminary guidelines on their website www.financialstability.gov and claim that step one of their plan will provide the opportunity for up to 4 to 5 million responsible homeowners to refinance.

Here is my question... How many of those homeowners will live in California... specifically Sacramento?

As we all know, mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 90% of the value of their homes have a difficult time securing refinancing.

For example, if a borrower's home was worth $200,000, he or she would have limited refinancing options if he or she owed more than $180,000 (90% of current value). Yet millions of responsible homeowners who put money down and made their mortgage payments on time have, through no fault of their own, seen the value of their homes drop low enough to make them unable to take advantage of these lower rates.

Trust me... I want this program to work and I feel it could really help many folks out of a tough spot... but I just don't see how the numbers will add up for California... specifically Sacramento residents.

So what are Obama's Making Homes Affordable Plan rules and who will qualify?

You may be eligible if you:

1. The home in question must be owner occupied and be one - four units.
2. The loan on your home is owned or controlled by Fannie Mae or Freddie Mac.
3. You are current on your mortgage payments (current means that you haven't been more than 30-days late on your mortgage payment in the last 12 months.)
4. You believe that the amount you owe on your first mortgage is about the same or slightly less than the current value of your house. (Here is where California Residents are going to have issues.)
5. You have a stable income sufficient to support the new mortgage payments.

If you look at rules #1, #2, #3, and #5 are pretty straightforward.  You will obviously need to have stable income and good credit history in order to qualify.  That is nothing new in today's market!   

#4 is most likely going to be a deal breaker for many California Residents.... and here is why...

The best way I can explain this to you is by giving you an example...

Mr. and Mrs. Buyer purchased a home in 2005 for $400,000 and put 10% down.  This left them with a first mortgage in the amount of $320,000 and a second mortgage in the amount of $40,000. 

Mr. and Mrs. Buyer want to take advantage of the lower interest rates, but are unable to qualify for a traditional refinance because their home will now only appraise for $280,000 (30% reduction in value).

Now for folks not in California, Florida, and Michigan... you might think I am crazy for using this 30% figure for depreciation, but frankly that is a very conservative number for the Sacramento Area.  I am not saying that ALL areas in Sacramento are seeing this decline, BUT most are seeing much more than the 30% dip. Now back to my example...

In order to meet the requirement for Obama's new plan, Mr. and Mrs. Buyer would need to have an existing 1st mortgage of no more than $294,000 (105% of the value...max). That equates to no more than an approximate 16% reduction in value since they bought their home. This model for qualifying certainly was not designed for California residents who have seen their value drop, often times in half right before their eyes.

Let's say you are in one of the few areas in Sacramento that saw little depreciation...lucky you! You still have one more hurdle to jump through before you get your pen warmed up to sign your loan paperwork! 

If you have a second mortgage like Mr. and Mrs. Buyer, that lender would need to agree to subordinate their loan based on the current terms of the new refinance.  Am I loosing you yet???? Ok..Ok... let me explain what the heck that means! 

When Mr. and Mrs. Buyer purchased their home, the 2nd mortgage lender agreed to be in 2nd lien position on title based on the original 1st mortgage terms.  If Mr. and Mrs. Buyer could qualify for the new 1st mortgage refinance program and value was not an issue, they would need to get their current 2nd mortgage holder to agree to subordinate (keep their second lien position) based on the terms of the new 1st mortgage. 

Common sense says... Why wouldn't the 2nd mortgage holder agree to this?  Mr. and Mrs. Buyer will see an improvement to their overall cash flow because the improvement of the interest rate will equate to a reduced 1st mortgage payment. Well... Banks don't always seem to be using common sense these days!   

I would hope that most banks who are in 2nd lien position are going to go along with new subordination since it only strengthens their position in my opinion.  I would, however, expect it to take weeks in order for them to make that decision, based on their reduced staff and increased workload. 

My final thoughts...

I don't want to be among those who want to list the 14 reasons why these stimulus plans will not work. I want more than anything to find a way to pick our country up and dust ourselves off and get back to being great again! It is just that this particular plan does not seem to pencil out for most Sacramento residents.

Please also keep in mind that the information I am providing you is still in the infant stage and there are many more details to be released.

 I would love to hear your opinion on this matter... pop me a comment below!

This blog by:

Team Newington
Sacramento Mortgage Planners
(916) 687-6868
www.SuperiorLoanTeam.com

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