HOW IT EFFECTS YOU

Current, at risk Borrowers: Your lender may agree to lower your loan balance up to 90% of your home’s current appraised value so that they may receive part of the $300 Billion in new 30-Year fixed rate mortgages the government is insuring. The Congressional Budget Office (CBO) estimates this will help 325,000 people to stay in their homes.

 

Kathleen Pender
Sunday, November 16, 2008

Last week, the government announced a program that will substantially lower payments for many homeowners who have little or no equity, but only if they are at least 90 days delinquent.
Critics say the plan, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.

The Federal Housing Administration is offering two programs to help homeowners get more-affordable mortgages, FHA Secure and Help for Homeowners. Neither requires borrowers to be current on their payments.  The program announced Monday goes a step further by requiring homeowners to be late.
The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac and 27 loan servicers, promises to swiftly reduce payments for certain homeowners who appear to be on the verge of foreclosure.

How to qualify
To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home's value. It's fine if you owe more than it's worth. Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies.

The reduction can be accomplished in one or more ways: Reducing the interest rate, but not below 3 percent. Extending the term of the loan up to 40 years.

Reducing the principal on which monthly payments are calculated. The reduced interest payments never have to be repaid.
"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."
Schiff predicts that loan agents "will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan."

Credit score impact
Risking your credit score for a lower rate "sounds like a game of chicken on the lending highway," says Craig Watts, a spokesman for Fair Isaac, which markets the FICO credit score.  In the latest version of FICO, which is just being rolled out, "one isolated delinquency will do less damage to your score than it has in the past," Watts says. Consumers who suffer a severe delinquency can rebuild their scores over time by paying all credit accounts on time and keeping their balances low.
"If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I'd be for keeping the home," Watts says. "Your score will bounce back."