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.