On February 18, 2009, President Barack Obama announced a $75 billion plan to help stop foreclosures. The Homeowner Stability Initiative (HSI) will help between 7-9 million homeowners avoid foreclosure by restructuring or refinancing their mortgage. The plan has three components.
Enable 4-5 Million Homeowners to RefinanceThis component helps homeowners who are "upside down" in their mortgage. Housing prices have fallen 25% since 2005, so people who bought homes then have found their mortgage is worth more than the value of the home. Usually, banks won't allow homeowners to refinance if the amount they owe on the mortgage is greater than 80% of the value of the home.
The HSI allows people whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae to refinance at today's lower interest rates, reducing monthly payments.
Provide Loan ModificationsThis component would reduce monthly payments to 31% of the homeowner's income. The lower interest rate will stay in effect for five years. The Treasury Department will pay $1,000 towards reducing the principal on the loan for each year (up to five years) that borrowers stay current on their payments.
Banks will receive incentives for participating. First, the government will subsidize any bank losses sustained in modifying the loan. Second, mortgage holders will receive $1,500 and servicers $500 to modify loans before the holder falls behind. Servicers will also receive $1,000 for every successful loan mod, and receive an additional $1,000 for the next three years the loan remains in place. This portion of the plan will be paid for from TARP funds
In addition, the government will create a $1.5 billion fund to help renters who are forced to relocate due to foreclosed homes. A $2 billion Neighborhood Stabilization Fund will be created to help neighborhoods that become distressed as a result of foreclosed homes.
Increase Funding to Fannie Mae and Freddie Mac
The Treasury Department will purchase an additional $200 billion of preferred shares in Fannie Mae and Freddie Mac. This will allow the two agencies to purchase and guarantee more mortgages - up to $900 billion. This portion of the plan will be paid for from existing Housing Recovery Act funds.(Source: Treasury Department,"Homeowner Affordability and Stability Plan," February 18, 2009)
Understand How the Foreclosure Process Works
After about three months of missed payments, the foreclosure department will send a notice of default, asking that you pay up by a deadline. If you miss that deadline, the loan will be sent to a local attorney to begin foreclosure proceedings. All this time, late fees and legal fees are accruing. The impending foreclosure must be advertised and will eventually result in a public auction of the property. Most states allow you to save your home by negotiating a loan modification throughout the process. However, if you haven't paid and are still in your home at the time of the auction, the Sheriff's Department may have to remove you from your home.
The foreclosure process will cause stress and strain and can last up to a year. In addition, your credit score will be negatively affected, and the foreclosure remains on your credit report for 7-10 years. You will not be eligible to buy another home for five years. The IRS considers a foreclosure as a home sale, so you may need to report any gain or loss.