Refi or modify?  Count on us to clarify.

by Dave Eshleman and Adele Gallucci-Cevola 

In an unprecedented effort to stabilize home prices, the government announced guidelines March 4 for the long awaited Making Home Affordable program. 

The program has two basic components that, at least in theory, should allow millions of Americans to refinance or modify their existing mortgages. 

If your mortgage is in good standing but you can’t refinance because you owe more than your house is worth, you may be a candidate for a MHA refinance.  To qualify, the home must be your primary residence and the loan must be owned by Fannie Mae or Freddie Mac.  You should find out if either institution services your loan by going to: ( This site also includes a self-assessment tool.)

http://financialstability.gov/makinghomeaffordab;le/refinance_eligibility.html. 

If your mortgage is in good standing but you’re at risk for default because your rate will be adjusting or you’re experiencing a documentable financial hardship, you may be eligible for a MHA modification.  To qualify, the home must be your primary residence, you must have insufficient liquid assets, you must not owe more than $729,750, and your loan must have been originated prior to Jan. 1, 2009.

How does the program work?  

The servicer will ask for proof of your income.  With that, they’ll arrive at your actual “top” or “front-end” qualifying ratio, which is your monthly mortgage payment, real estate taxes, fire insurance and HOA dues divided by your gross monthly income. The servicer will take the following steps to arrive at a ratio that doesn't exceed 31%: reduce your interest rate to as low as 2%, amortize your remaining balance over 40 years, and forbear (not forgive) principle.

If that ratio can not be accomplished by those steps, you should explore other options with your servicer.  If you want more details, you can go to:   http://www.treasury.gov/press/releases/reports/modification_program_guidelines.pdf

What’s the catch?

The program is not a panacea.  It will not help every homeowner, especially in the Bay Area, which is considered a high cost area.  Furthermore, it requires voluntary participation by the servicer and an initial solicitation by the homeowner.  Here are some other concerns: 

·        With the millions of Americans who are expected to participate, it may take up to nine months before someone is assigned to handle your case. 

·        It will not help those who bought homes they knew they could never afford.

·        The modified rate will be in effect for five years only, at which time the rate will be subject to incremental increases of 1% annually. 

·        If the principal is forborne, the loan could be subject to a balloon payment. 

·        The program will require impounds, meaning the inclusion of your property taxes and insurance in your monthly mortgage payment.

·        According to the President, the program won’t cost taxpayers a thing.  Maybe not today, but as the government continues to print money at a feverish pace, inflation and higher interest rates, which go hand in hand, may result.    

·        Also, as with any government program involving billions of dollars, new scams will be born.  You can avoid this by working directly with your lender or a HUD-approved counselor. 

Please feel free to contact us for an analysis of your current mortgage and if you can benefit from the MHA program.