On Wednesday, President Obama continues to roll out plan to help homeowners refinance their mortgages, from high interest rate loans into low interest rate mortgages. This proposal will allow millions of borrowers, but only those current on their mortgage, to save to an average of $3000 a year by refinancing into FHA-backed loans.
The administration estimates the cost will fall somewhere between $5 billion to $10 billion and will not add to the mammoth debt. Unlike other plans, this one will require the U.S. Congress to approve it. To pay for his plan, the president proposes Congress charge large banks a fee.
Some critics already predict the plan will not make it out of the House.
Similar proposals floated in the past have had a hard time making it through Congress, which has traditionally rejected any provision idea of taxing big banks.
Other Plans to Stimulate US Housing Market Has Failed
The first of many plans floated by the Obama administration, and actually executed, started three years ago with the Home Affordable Modification Program or HAMP. HAMP had the lofty intention of providing the solution to thwart the landslide in foreclosures taking place across the nation.
Next, the Home Affordable Refinance Program or HARP. HARP, which has been reworked a couple of times, targets homeowners saddled with underwater mortgages in a market of steadily declining home values.
The one common thread throughout both programs is the failure to help as many homeowners as originally outlined for each initiative. Together, as many as 9 million homeowners who held government owned or insured loans from Fannie Mae and Freddie Mac were to receive loan modifications, mortgage refinancing or both.
At the most, a combined 2 million Americans actually receive some form of help from the programs. Remember, HARP has undergone a couple of revisions—both within the last three months. The final number of homeowners this program will ultimately benefit remains open.
Outline of the New Mortgage Refinance Scheme
This new plan, aims to help homeowners who hold private mortgages, but have a problem refinancing because their outstanding mortgage balance exceeds the market value of their homes.
The eligibility requirements are as follows:
- Must not have a have missed mortgage payment for least six months
- No more than one late payment in the six month period for applying
- Borrower were Borrower must have FICO score of 580 or higher
According to president Obama, 90% of the borrowers should have the ability to meet the conditions to qualify for a mortgage refinance. In addition, the borrower’s outstanding mortgage cannot exceed the loan limits in accordance with FHA insured loans for their region. The limits range from $271,050 to 729,250 down. Only homeowners who live in the unit as their principal residence can apply for the program.
The new program would also require mortgage lenders to write down mortgage balances for homeowners who owe more than 140% of their homes worth. Reducing the principal will minimize the risk of future default by the homeowner, according to the administration.
Borrowers will gain immediate financial relief. By reducing the principal, and refinancing into low interest rate mortgages, homeowners will receive a significant reduction in their monthly mortgage payments.
Using the president’s example, a homeowner who currently has a 6% interest rate on their home mortgage, who refinances to a 4.25% rate, and carries a $200,000 mortgage balance, will pocket about $216 a month savings, on a 30-year fixed rate mortgage.
Homeowners will also have a choice of refinancing into 20-year fixed rate mortgages, which may not reduce their monthly payment by much, but generates quicker build up of home equity, and pays off the loan faster.
As an incentive for owners to choose this option, FHA would pay closing costs and save the average borrower around $3000.
The president actually touched on this idea in his latest state of the union address. The administration strongly believes this latest effort, which is geared toward homeowners who are not in the foreclosure pipeline, would give a strong boost to the housing sector. In addition, 3.5 million homeowners will have more cash in their pockets and stimulate consumer spending.