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House Much Did You Say That Is?

by Susannah Kopecky, published

Don't believe the naysayers who pooh-pooh the idea that the The Homeowner Affordability and Stability Plan will only help a small fraction of California homeowners: the data on that is not even readily available. However, the median home price in California a year ago was under $600,000.

Under the federal plan, those who owe less than or equal to $729,750 on their first mortgage, and are suffering financial problems on a mortgage secured by or before January 1, 2009, are basically eligible. Does it make sense that in a state with a median home value well under $729,750, only a small fraction of homeowners would benefit? Didn't think so. Let's take a look at some of the facets of the mortgage news of today, and see if the federal relief programs will actually help Californians.

The Homeowner Affordability and Stability Plan signed into law by President Obama stipulated that some homeowners could borrow more than 100 percent on the value of their homes, to up to 105 percent. According to CNN, more than 27 percent of homeowners are "underwater," or owe more for their home, than the price at which the home was actually valued. The loan modification program is geared toward those homeowners.

The objective of this plan is "to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable payments that are sustainable for the life of the loan." In his March 7 radio address, Gov. Schwarzenegger stated that in California, "new data shows more than 136,000 loan modifications occurred throughout California in 2008," though there still remains "the threat of foreclosure still looms over thousands of California families and risks our economic recovery."

According to the White House blog, "Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance." Under the plan, the renegotiated mortgages will last a "30 or 15 year term with a fixed interest rate."

Some early reports have questioned how helpful this loan program actually could be. Those who owe significantly more than the loan they took out, are classified as being "underwater" in debt-terminology. It may appear that with home value decreasing in California, such a proposal should benefit the majority; however, this mortgage modification program refers to the prices at which homes were bought, many of which were purchased when home prices were significantly higher than their current value.

Some of these same borrowers (at the present time, the date is not widely available) may well accrue well more than 5 percent of additional debt above the loans first secured. Welcome to the bloated and overpriced housing market of California.

According to the FDIC, the Treasury will be spending "up to $50 billion dollars to make mortgage payments affordable and sustainable for middle-income American families that are at risk of foreclosure. Borrowers who are delinquent on the mortgage for their primary residence and borrowers who, due to a loss of income or increase in expenses, are struggling to keep their payments current may be eligible for a loan modification." The FDIC statement further went to acknowledge a partnership with the Treasury, HUD and "other federal agencies" to get the "massive program" officially running by March 4.

Visiting FinancialStability.gov, the visitor is presented with an offer of snake-oil salesman quality, encouraging homeowners to peek in, and find out if the new bill and loan modification plan will help them:

If you can no longer afford to make your monthly loan payments, either because your interest rate has increased or you have less income or you are experiencing a hardship that has increased your expenses (like medical bills), you may qualify for a loan modification to make your monthly mortgage payment more affordable. Millions of borrowers who are current, but having difficulty making their payments and borrowers who have already missed one or more payments may be eligible.

Visitors are asked to consider four questions to find out if they are qualified for a "Home Affordable Modification":

  1. "Is your home your primary residence?
  2. Is the amount you owe on your first mortgage equal to or less than $729,750?
  3. Are you having trouble paying your mortgage? For example, have you had a significant increase in your mortgage payment OR reduction in your income since you got your current loan OR have you suffered a hardship that has increased your expenses (like medical bills)?
  4. Did you get your current mortgage before January 1, 2009?"

The lucky visitor who answers yes to all of the above, is invited to click a beckoning green button to find out more. Entering, visitors are instructed to pull out the necessary documentation, then "call your mortgage servicer and ask to be considered for a Home Affordable Modification. The number is on your monthly mortgage bill or coupon book."

(Does anyone feel bad for the mortgage companies being told what to? Don't. According to the Treasury, those who comply and succeed, will "receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive 'pay for success' fees -- awarded monthly as long as the borrower stays current on the loan -- of up to $1,000 each year for three years.")

Funny thing is, there is finally some transparency, but it is found only after a nice, long search. On the FinancialStability.gov website, those homeowners who must click the foreboding "other options" button are finally treated to a clear answer: No, "the plan will not help everyone." That's right, you heard it here: the universal bailout, paid for by taxpayers, is not in fact, designed to help all of the same taxpayers. If that wasn't juicy enough, the statement goes on to explain that the plan "is not designed to reduce mortgage balances for borrowers who have sufficient income to make their mortgage payments but owe more than their homes are worth. It also will not help investor borrowers or borrowers who have no income and cannot make any mortgage payment."

According to the Treasury, the reasoning behind the Homeowner Affordability and Stability Plan is threefold: 1.) To refinance up to 4 - 5 million "responsible homeowners to make their mortgages more affordable;" 2.) To provide a "$75 billion homeowner stability initiative to reach up to 3 - 4 million at-risk homeowners;" 3.) To support lowered mortgage rates by "strengthening confidence in Fannie Mae and Freddie Mac." The Treasury also alleges in its support of the bill, that "each foreclosed home reduces nearby property values by as much as 9 percent." Supporting examples were not available. And the controversial possibility of allowing judges to reinvent history by changing mortgage deals, is still on the table with this plan.

Many Californians purchased homes before the housing bubble burst, at which point the median home price was well over $500,000, nearly $600,000. However, that is still less than $729,750. According to California Governor Arnold Schwarzenegger, California has been working to battle mortgages woes in a number of ways, including a "voluntary agreement with major lenders to freeze interest rates for homeowners most at-risk to foreclosure."

And just some of the prerequisites to qualifying for the loan modification include having a home debt of less than or equal to $729,750 or less (which, interestingly, is now the standard rate as applied for extremely affluent areas, though previous applied maximum caps nestled closer to $400,000), and having a mortgage payment exceeding 31 percent of monthly income.

By the way, some of those disqualified from the loan re-finagling include those who lost their jobs, those who invested in homes in which they do not live (kind of shutting the door on investing, eh?) and those who owe mortgages above threshold of $729,750, also known as "Loan Limits for Conventional Mortgages." As provided by eFannieMae, 2008's loan limits ran, for a single-family home, from about $415,000 to over $600,000, though those limits were later "temporarily" raised to the new limits of today.

This will exclude those who purchased homes in areas in which there is, or at one point was, a high demand and extremely high housing prices. The California housing market still contains some of the highest-priced homes in the country. According to DQ real estate news, within one year, from January 2008 - January 2009, the median price of a home in the Bay Area dropped to just under $300,000 from a previous high of about $550,000. CAR, in a recent news release, also noted that the average price of "an existing home" fell by 40.5%, to the median price of $254,350. This, in tandem with the news of California's housing market semi-rally in January with the reported selling of over 600,000 homes which was 100.8 percent higher than it had been one year before.

Say you bought a home and took out a mortgage a few years ago, of over $800,000, just so you could buy that middle-sized home in the excellent school district: you don't quality for this program. In Southern California, there was just as dramatic of a shift, with a one-year drop of just over $400,000 as the median home price, to about $250,000. Those who purchased homes in areas such as Santa Barbara, which the CAR has variously listed as one of the most expensive cities in which to live (with a median home price closer to $1,000,000 than the statewide average of about half that amount) are not exactly the target audience of the new mortgage relief programs. Then again, if someone was able to purchase such a home, they most likely have the assets to secure such a home already.

Between the dangers of the inflated and unadjusted Alternative Minimum Tax (as indexed according to property tax rates) and a federal stimulus plan that may help less than 10 percent of mortgage holders in California (according to the LA Times), the state housing market has yet to change significantly for the better at this point of mid-March 2009, though the bottom may not be far away; the signs are there, but not all of the pieces of the puzzle are in place yet.

Commissioner Davi of the California Department of Real Estate has noted that, "On some fronts, we have turned the corner. Many of the issues that caused the crisis have abated, either by market corrections or regulatory efforts. DRE investigations revealed that stated income loans were used in the majority of cases that involved fraud. Such loans have all but disappeared from the market place."

The CA Department of Real Estate has already prepared an "Advanced Fee Agreement" template, for the purpose of facilitating "shortened loan modification services." Even if some Californians remain ineligible to benefit off of the loan modification program, the state and new programs are still offering rather generous assistance to those who can stand to reap the benefits.

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