February 19, 09

NEWS / Support Under the Homeowner Affordability and Stability Plan: Three Cases

Support Under the Homeowner Affordability and Stability Plan: Three Cases
Family A: Access to Refinancing
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In 2006: Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.
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Today: Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000.
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Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing.
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Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.
Existing Mortgage
Refinancing
Balance
$199,584
$203,575
Remaining Years
27
30
Interest Rate
6.50%
5.16%
Monthly Payment
$1,308
$1,113
Savings
$196 per month, $2,347 per year
Family B: Access to Refinancing
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In 2006: Family B took a 30-year fixed rate mortgage of $350,000 on a house worth $475,000 at the time. (The family put just over 26% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.
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Today: Family B has about $337,460 remaining on their mortgage but their home value has fallen to $400,000.
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Their “loan-to-value” ratio is now 84%, making them ineligible for a Fannie Mae refinancing.
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Under the Refinancing Plan: Family B can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $4,000.
Existing Mortgage
Refinancing
Balance
$337,460
$344,210
Remaining Years
27
30
Interest Rate
6.50%
5.16%
Monthly Payment
$2,212
$1,882
Savings
$331 per month, $3,968 per year
Family C: Eligible for Homeowner Stability Initiative
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In 2006: Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker – Mom & Pop Mortgage – sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.
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Today: Family C has $214,016 remaining on their mortgage but their home value has fallen -18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.
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Their loan is now 113% the value of their home, making them “underwater” and unable to sell their house.
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Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.
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Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.
Existing Mortgage
Loan Modification
Balance
$213,431
$213,431
Remaining Years
27
27
Interest Rate
7.50%
4.42%
Monthly Payment
$1,538
$1,132
Savings:
$406 per month, $4,870 per year
Homeowner Stability Initiative: How the Program Works for the Lender, Government and Borrower
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First, Investment Bank (working through a mortgage servicer) reduces the interest rate so that the Family C’s monthly debt-to-income ratio drops from 42% to 38%. This means that Investment Bank must reduce the interest rate from 7.50% to 6.38%, bringing down Family C’s monthly payment from $1,538 to $1,387.
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Second, the government and Investment Bank share the cost of further reducing the interest rate so that the Family C’s monthly debt-to-income level is lowered to 31%. Any dollar the bank spends is matched by the government. At this stage, Family C’s interest rate is reduced from 6.41% to 4.43%. In total, Family C’s monthly payment has fallen from $1,538 to $1,132.
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If Family C remains current on their payments, they will receive incentive payments up to $1,000 a year, or $5,000 over five years, that would go towards reducing the principal they owe. Additionally, the mortgage servicer can earn an up-front incentive fee of $1,000, plus up to $1,000 per year in “Pay for Success” fees for three years, so long as Family C remains current