The mortgage bailout stimulus program was designed to get homeowners, lenders, loan servicers and the government to work together to help homeowners avoid foreclosure. The program helps homeowners by modifying or refinancing their mortgage to lower their monthly payments.
Homeownership in an Economic Downturn
In 2006 the United States economy started to take a downturn. Companies started to cut back and laying off employees. At the same time, many homeowners started to receive interest rate increases on their mortgage loans due to special financing arrangements they had made during recent home purchases.
The rising unemployment and the increasing mortgage payments started to increase the number of foreclosures. With the rising number of foreclosed properties available on the market, property values started to fall.
Many homeowners found themselves unable to make mortgage payments due to their loss of employment or the rising cost of the mortgage payments.
During the early months of 2009, interest rates fell to very low levels. Some homeowners tried to refinance their mortgages to lower the monthly payment. Many were denied since the decline in the value of their home left them owing more than 80 percent of the value of their home. Even though the homeowner had been faithfully making their full monthly mortgage payment, they were unable to refinance their mortgage loan to take advantage of a lower interest rate and a lower monthly mortgage payment.
Understanding the Mortgage Bailout Stimulus
The mortgage bailout stimulus program, called the Making Home Affordable program, was introduced in March 2009 to help homeowners who are trying, but who are unable, to pay their mortgage payments. The stimulus package included a $75 billion program to prevent foreclosures and to help homeowners find ways to remain in their homes.
The stimulus package includes:
- Mortgage modification
- Refinancing assistance
- Incentives to homeowners, lenders and loan servicers
Mortgage Modification Program
The mortgage modification program focuses on homeowners who are at risk of losing their home because of a decrease in their income or an increase in their interest expenses. Homeowners do not have to be in default on their mortgage to have their loan modified. They are encouraged to contact their lender as soon as they think they are at risk of defaulting.Qualifications for loan modification include:
- The home is your primary residence
- The mortgage is $729,750 or less
- Verification of income sources
- Copies of recent tax returns
- A willingness to work with a debt counselor
Qualified homeowners can have their monthly mortgage payment reduced so that it does not exceed 31 percent of the homeowner's income. To accomplish the reduction in the monthly payment, the interest rate is lowered and the term of the loan may need to be extended (a thirty year loan can become a forty year loan.)
The modified payment will remain at the lower level for five years. After five years the interest rate can be raised by one percent each year. The maximum interest rate is "capped" at the interest rate of other loans at the time of the modification.
The stimulus package includes new mortgage modification guidelines which are designed to become the new industry standard practice. Now lenders, loan services, Fannie Mae and Freddie Mac will all use the same guidelines when modifying mortgage loans. Homeowners with FHA loans will see reduced fees and will be encouraged to participate in the FHA Hope for Homeowners program, a program designed to help homeowners who are having trouble making their monthly mortgage payment.
Part of the new modification guidelines will include a provision that affects homeowners who go into bankruptcy proceedings. If a homeowner is not able to obtain a loan modification and goes into bankruptcy, their outstanding mortgage balance can be reduced to the current market value.
The stimulus program was designed to allow homeowners to refinance their high rate mortgage even if the value of their property has dropped, reducing their equity. To qualify for this special refinancing assistance:
- The mortgage:
- Must be owned or guaranteed by Fannie Mae or Freddie Mac
- Can be on a primary residence, second home or investment property
- Can be either a fixed or adjustable rate loan
- The homeowner:
- Must owe no more than 105 percent of the property's current value on the first mortgage
- Cannot have missed any mortgage payments
Incentives for HomeownersFinancial incentives are part of the stimulus program to encourage mortgage holders to take advantage of the loan modification program or other actions to avoid foreclosures:
- Incentive to get help early - Homeowners will receive an incentive payment of $1,500 if they receive a loan modification while they are still current on their mortgage payments.
- Incentive to stay in the program - Homeowners will receive an annual $1,000 reduction in the balance on their mortgage principal during the first five years after the loan was modified.
- Incentive to avoid foreclosure - If a homeowner is not able to modify their loan, they may be eligible for up to $1,500 in relocation expenses if they use an alternative to foreclosure such as a short sale.
Incentives for Lenders and Loan Servicers
The stimulus program also provides financial incentives to lenders and loan servicers to encourage them to modify their existing mortgages, offer refinancing options and to encourage them to work with homeowners before they miss their first monthly mortgage payment.
Get Help Early
The best time to contact your lender or loan servicer about one of these programs is before you miss a mortgage payment. If you wait until you have missed a few payments it may be too late to work with your lender on a loan modification program and you may face a foreclosure.
Contact your lender or loan servicer for information on any of the stimulus programs. You can also contact any of the Department of Housing and Urban Development (HUD)-approved housing counseling agencies. Their counselors are trained to work with homeowners to determine which stimulus programs could work in their particular financial situation. There is no cost to work with a counselor since these are nonprofit agencies.