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Old 02-19-2009, 09:24 PM
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Default Will the housing bailout help you?

Borrowers who are 'underwater' and current on their loans will be able to refinance -- as will those whose payments are unaffordably high. And there are incentives for lenders and borrowers.

By MSN Money staff and wire reports

What's in President Barack Obama's housing rescue plan for you?

Maybe lower house payments, and not just for those already in default.

"All of us are paying a price for this home mortgage crisis," Obama said Wednesday in announcing the program during a ceremony at a Phoenix-area high school.

The housing industry has been devastated by the nation's recession. Construction of homes and applications for future projects both plunged to record lows in January as all parts of the country showed big declines in building activity. Analysts hope that boosts from government programs, including steps to stem foreclosures, will help stop the slide.

Headlining Obama's efforts is the $75 billion Homeowner Affordability and Stability Plan, which will provide a set of incentives to lenders to cut monthly mortgage payments to sustainable levels.

Another key component: a new program aimed at helping homeowners who are "underwater" -- who owe more on their mortgages than their houses are worth. Such mortgages have traditionally been almost impossible to refinance. But the White House said its plan will help 4 million to 5 million families do just that.

Following are the changes most likely to affect you.

Refinance, even if you're 'underwater'

Mortgage rates at near-record lows could make payments more manageable for homeowners trapped by falling prices. Though many of these owners are current on their payments, plummeting prices have kept them underwater. Homeowners whose mortgages were bought or guaranteed by Fannie Mae or Freddie Mac typically need equity of at least 20% to refinance. Obama's program would change that requirement, allowing even those who owe up to 105% of their home's value to refinance.

An example of the potential savings: A family took out a 30-year fixed-rate mortgage of $207,000 at 6.5% on a house worth $260,000 at the time of purchase. Today, that family has about $200,000 remaining on its mortgage, but the value of that home has fallen to $221,000, keeping the owners below the 20% threshold and leaving them ineligible to refinance. Under the Obama program, that family could refinance to a rate near 5.16%, reducing annual payments by more than $2,300.

The Obama administration stresses that homeowners need not be delinquent to qualify. Nearly 27% of U.S. homeowners with a mortgage are underwater, according to Moody's Economy.com. The administration believes as many as 5 million homeowners with Fannie Mae- and Freddie Mac-backed mortgages will qualify.

You'll probably have to contact the company that services your mortgage to find out whether your loan qualifies. Only conforming loans are included, so buyers who owe more than the jumbo limit of $417,000, for most locations, are out of luck.

Payments could be reduced, not just delayed

Current mortgage-workout plans typically allow more flexibility with payments but rarely reduce the amount owed, a factor most experts cite in such actions' failure to stem the foreclosure crisis. The Obama program concentrates on affordable monthly payments, with taxpayers and lenders sharing the costs of reducing interest rates and principal to an amount that borrowers can actually repay.

An example of the potential savings: The lender would first be responsible for bringing down interest rates so that a borrower's monthly mortgage payment was no more than 38% of pretax income. The Obama program would match further reductions in interest payments dollar for dollar with the lender to bring that percentage down to 31%. If the borrower were spending 43% of his monthly income on a $220,000 mortgage, that could mean a reduction in monthly payments of more than $400. That lower interest rate would have to be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification.

Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with taxpayers sharing that cost, too.

The Obama administration estimates the $75 billion program could reach up to 4 million at-risk homeowners.

Pay borrowers and lenders for success

Mortgage service companies will receive an upfront fee of $1,000 for each eligible modification. They will also receive pay-for-success fees -- awarded monthly as long as the borrower stays current on the loan -- of up to $1,000 each year for three years.

Borrowers who pay on time will receive a monthly balance-reduction payment that goes straight toward reducing the principal of the loan. As long as a borrower stays current, he or she can get up to $1,000 each year for five years.

To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, incentive payments of $500 will be paid to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrowers fall behind.

Remove uncertainty around further price declines

To encourage lenders to modify more mortgages and enable more families to keep their homes, the administration and the Federal Deposit Insurance Corp. have developed an insurance fund (of up to $10 billion) that would pay mortgage holders for each modified loan if the home price index declines.

Institute consistent, clear guidelines for loan modifications

The Treasury will develop uniform guidance for loan modifications across the mortgage industry. All financial institutions receiving bailout money going forward will be required to implement loan-modification plans consistent with the guidelines. Fannie Mae and Freddie Mac will use these guidelines for loans they own or guarantee, and the Obama administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market.

The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, the Treasury, the Federal Reserve, the FDIC, the Department of Veterans Affairs and the Department of Agriculture.

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