NorthJersey.com

Homeowners' $75B Lifeline

NorthJersey.com — Thursday, February 19, 2009

BY KATHLEEN LYNN, RICHARD NEWMAN AND SERDAR TUMGOREN
STAFF WRITERS

President Obama's $75 billion plan to prevent foreclosures won praise Wednesday from lenders and housing advocates, who said it should help many distressed homeowners keep their properties.

The funding is "sufficient in scope to have a significant impact," Diane Casey-Landry, a senior executive with the American Bankers Association, said in a statement.

Phyllis Salowe-Kaye, head of New Jersey Citizen Action, which advises homeowners facing foreclosure, called the proposal "the boldest plan that's come forth."

The Homeowner Affordability and Stability Plan would make it easier for owners to refinance their mortgages, even if they owe more than the property is worth; offers government funding to help modify loans so that monthly payments come to no more than 31 percent of household income; and offers incentives to lenders for modifying loans and to borrowers for keeping up with payments. Lenders' participation would be voluntary.

"All of us are paying a price for this home mortgage crisis, and all of us will pay an even steeper price if we allow this crisis to continue to deepen," Obama said in Mesa, Ariz.

The plan would affect an estimated 9 million homeowners. Details will be announced March 4, when the program starts.

One homeowner who recently faced foreclosure, Michael Esposito of Elmwood Park, welcomed Obama's plan. Esposito was able to get his loan renegotiated with the help of New Jersey Citizen Action, reducing his monthly payments from $4,000 to $3,000.

"Once you get the foreclosure notice, all kinds of lawyers' bills accrue, and all of these vultures start circling to get something out of you," he said. "If you can avoid foreclosure with some help from the government, that's a tremendous advantage."

Foreclosure actions rose sharply last year in New Jersey, although the situation is not nearly as dire as in such distressed housing markets as California, Florida, Arizona and Nevada. About 62,000 homeowners were in some stage of the foreclosure process in 2008.

In Bergen County, 410 properties were sold at sheriff's auction in 2008, up 68 percent from the 244 sold in 2007. In Passaic County, 600 properties were auctioned, up 72 percent from 348 the previous year.

"It's catastrophic," said Hackensack bankruptcy lawyer Ronald LeVine. "There's no end to the people in foreclosure now, and they're getting no help at all from the banks."

The government's earlier efforts to ease the foreclosure situation, including the Hope for Homeowners initiative announced last fall, have not done much to slow the tide, and some critics say that's because they were too little, too late.

In fact, even after their loans were adjusted, many homeowners got into trouble again, apparently because they still couldn't afford the payments. The federal Comptroller of the Currency reported in December that more than half of the home loans modified in the first quarter of 2008 fell delinquent within six months.

Obama's proposal includes allowing homeowners to refinance their loans to get a better rate even if they are "underwater," that is, they owe more than the house is worth. Now, many lenders require that homeowners have 20 percent equity in their properties before they can refinance. Under Obama's plan, homeowners who owe up to 105 percent of their home's value — for example, a $315,000 loan on a house now worth $300,000 — can refinance if their loans are backed by Fannie Mae and Freddie Mac.

Mortgage broker Wendy Nastasi, owner of Crossroads Finance Discount Mortgage in the Pompton Plains section of Pequannock, said that could help many New Jerseyans who are underwater on their mortgages.

She cited one recent customer who in June paid $278,000 for a Mahwah condominium, putting 20 percent down. The homeowner tried to refinance in December into a lower rate, but was unsuccessful because an updated appraisal set the condo's value at $258,000, a 7.2 percent drop in six months.

But Obama's foreclosure programs won't be much help to the growing number of New Jersey homeowners who are unemployed, Nastasi noted. "Anybody who's lost their jobs, they're probably not going to qualify," she said.

Several of the observers who praised Obama's plan overall still had some reservations. Citizen Action's Salowe-Kaye, for example, would have liked the administration to take a harder line with lenders, requiring them to modify troubled loans, instead of just offering them incentives to do so. Banks that accept government bailout aid will be required to modify loans.

And John A. Courson, CEO of the Mortgage Bankers Association, said he was "encouraged" by the plan, but said it could leave loan servicers open to lawsuits from investors, and would not offer help to borrowers whose loans exceed their property value by more than 5 percent.

"This will limit the plan's success in some of the hardest-hit areas in California, Florida, Nevada and Arizona, as well as some areas on the East Coast," Courson said.

The Obama plan would also offer mortgage servicers a $1,000 incentive, plus $1,000 a year for three years, for each successfully modified loan. And borrowers who participate in the program would get $1,000 a year, for up to five years, for a year's worth of on-time payments, applied against the mortgage principal.

In announcing his foreclosure plan, Obama endorsed a proposal in Congress to allow bankruptcy judges to lower mortgage payments for homeowners who have filed for bankruptcy.

Lenders strongly oppose the bankruptcy proposal, arguing that they would have to raise interest rates and tighten credit to offset the added risk, and that would impede a housing market recovery. "If that came in, you'd need higher credit scores and lower loan-to-value ratios to get a loan," said Alfred F. Buzzetti, president of Bank of New Jersey in Fort Lee

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With mortgage interest rates at their lowest point in years, many homeowners could save significant amounts by refinancing. But many lenders require homeowners to have 20 percent equity in their homes — a problem for recent buyers whose homes have lost value.

Under the Obama plan announced Wednesday, homeowners whose mortgages are worth up to 105 percent of their home's actual value will be able to refinance their loans through Fannie Mae or Freddie Mac.

For example, consider a family that took out a 30-year fixed-rate mortgage of $350,000 with a 6.5 percent interest rate on a house worth $400,000 at the time. Today, that family has $345,000 remaining on the mortgage, but the value of the home has fallen 15 percent to $340,000 — making them ineligible for refinancing into current low interest rates, which generally require 20 percent home equity. Under Obama's refinancing plan, the family could refinance to a rate that is currently near 5.2 percent - reducing their annual payments by more than $3,800.

— Kathleen Lynn


ARE YOU ELIGIBLE?

FREQUENTLY ASKED QUESTIONS

Between the $75 billion foreclosure plan President Obama revealed on Wednesday and the $787 billion economic stimulus he signed a day earlier, the government is promising a range of programs aimed at getting new help to homeowners.

Here are some more answers about the latest round of aid for homeowners.

Q. Can I get any assistance if I have a second mortgage?

Borrowers with a second mortgage are eligible as long as their first mortgage isn't more than 105 percent of their home's value. The value of your property will be determined after you apply to refinance.

Q. Any breaks for first-time home buyers?

Under the economic stimulus plan that Obama signed Tuesday, first-time home buyers who purchase a home between Jan. 1 and Dec. 1 will be eligible for a tax credit of 10 percent of the value of the home, up to $8,000.

Homeowners don't have to pay back this credit over the next 15 years, the way they had to with the $7,500 tax credit enacted last summer. However, home buyers would have to repay the credit if they sold their homes within three years.

First-time buyers are defined as those who haven't owned a house for at least three years.

Q. Any other breaks for current homeowners?

Homeowners also can get a tax credit of up to $1,500 by making their homes more energy-efficient this year or next. Many projects qualify, such as installing energy-efficient windows, doors, furnaces or air conditioners, or adding insulation. Homeowners can get back 30 percent of their expenses, up to $1,500.

Q. Will there be more assistance down the road?

The Obama administration is working with lawmakers to pass a bill that will allow bankruptcy judges to modify the terms of primary home loans in court.

The lending industry is fighting this plan, arguing that it will make lending a risky proposition in the future. But with support mounting, the industry's efforts are primarily focused on limiting the scope of the bankruptcy proposal, rather than blocking it completely.

Q. How soon can I expect to take advantage of these benefits or aid?

The refinancing and loan modification programs start March 4. The first-time home buyer tax credit is in effect from the first of the year through the end of November. The "green" home tax credit applies to energy-efficient improvements made through 2010.

Q. What should I do until March 4?

If you're interested in refinancing or applying for a loan modification, collect all necessary documents to give to your lender.

These include your most recent pay stubs and/or other documents detailing the income you receive, your most recent tax return, information about your second mortgage if you have one, payment information on your credit cards if you carry a monthly balance and payment information on all other loans, like student loans and car loans.

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