Saturday, 21 February 2009

Homeowner Affordability and Stability Plan

On February 18th 2009, President Obama announced Homeowner Affordability and Stability Plan (if you want to read the details, please see below link).

Homeowner Affordability and Stability Plan

Here is the summary of the plan


- Provide opportunity to home owners who is suffering from high mortgage payment and whose debt is too high to do refinancing.

- By doing this, home owner can reduce mortgage payment as low as 31% of total income (31% or less debt coverage ratio).

- "Rescued loan will be guaranteed by Fannie Mae or Freddie Mac.


- For borrowers, if they pay on time, they will receive $1,000 a year for principal reduction for 5 years.

- For lenders, they will receive $1000 fee at the time of refinance and there will be bonus payment if borrowers continues to make payments.


- Targeting borrowers who are NOT behind on payment but who will have hard time making payment in future for rate adjustment or high debt-to-income ratio.

- If borrowers mortgage principal amount is higher than 105% of property value, they are disqualified.

- Conforming Mortgage Only ($417,000 or lower in many area -- up to $625,500 in area like San Francisco).

- Existing mortgage has to be "bought" by Fannie Mae or Freddie Mac.

- First mortgage only (not for second mortgage)

- Lowest mortgage rate available is 3%.

- Fixed up to 5 years.

- Owner-occupants only (not for investment properties)

I was quite surprised with this plan as government target the borrower who is "current" on the mortgage. I guess, since recent "intentional default" and "walking away" is causing such a moral hazard, the government wants to reward those who are making payment on time.

Additionally, it is quite notable that this plan exclude "underwater" home owner whose mortgage exceed 105% of LTV (say owe $105,000 but property value is lower than $100,000). One the the "negative equity" is one of the key reason borrowers walk away from the property. Since 17.6% of home owners have negative equity, I believe more than 10% of home owners have negative equity more than 105% of LTV. This indicate that these home owners with too much negative equity will continuously be the source of foreclosures (= housing will not bottom in near future).

I think this plan is good but does not solve core issues and housing bottom is yet to come.

Happy Investing!!!!!

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