In March, the Obama administration announced a plan to help homeowners avoid foreclosure that would provide billions of dollars in incentives to lenders for modifying home loans.

As part of that plan, government–owned lenders Fannie Mae and Freddie Mac, the two largest mortgage holders in the nation, unveiled a flexible refinancing program that would assist homeowners in obtaining a lower interest rate on their mortgage and mortgage payments homeowners could afford.

South Carolina’s temporary mortgage suspension plan comes as a result of a request from Fannie Mae’s attorney, Ronald Scott, who argued that a temporary suspension of foreclosure sales was necessary to ensure that homeowners who qualify for the federal programs wouldn’t lose their homes before being able to take advantage of the program.

Under the court’s ruling, South Carolina judges will be prevented from finalizing foreclosure sales statewide on properties with mortgages held by Freddie Mac, Fannie Mae, or any other lender that is participating in a federal housing assistance program.

Mortgage experts say that the ruling may be the nation’s first court-ordered foreclosure stop for an entire state.

Freddie Mac spokesman Brad German said that this ruling, issued by a court that has statewide jurisdiction, is the first he’s heard of in the country. He said, “We’re not aware of anything like this, anywhere else.”

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Many lenders including Freddie Mac and Fannie Mae agreed to temporarily halt foreclosures for several months in advance of Obama’s “Making Home Affordable” plan, which began in early April and may end up helping as many as 9 million homeowners avoid foreclosure through mortgage modifications or refinancing.

Obama’s plan comes too late for nearly 200,000 homeowners who had their homes repossessed by banks last quarter, according to RealtyTrac, a foreclosure data service. Nationwide, 804,000 homeowners received a foreclosure notice last quarter, a 24 percent increase from the same time period in 2008.

Foreclosures May Worsen Before They Get Better

More than 340,000 properties received at least one foreclosure notice in March alone, a 17 percent hike over the previous month and a whopping 46 percent increase over the previous year..

In March, foreclosures “came back with a vengeance” and are likely to keep rising, said Rick Sharga, senior vice president of marketing at RealtyTrac.

Shaun Donovan, Obama’s housing secretary, says that he expects there to be a further increase in foreclosures in coming months. Donovan speculates that these foreclosures may be on second homes, investor-owned properties, or vacant properties abandoned by homeowners who owed more on their mortgage than their home was worth.

However, Donovan is optimistic that the nation could see a decline in foreclosures beginning this summer.

Success of Government Program Questioned

Despite government optimism that the Obama administration’s foreclosure rescue program would help stem the tide of foreclosures, industry executives say that the plan’s success is ultimately dependent on how well it is received by lenders. So far, lenders have yet to embrace the voluntary program despite $75 billion in government incentives to modify loans.

“The effectiveness of the plan overall obviously is going to depend on the level of industry participation,” said Paul Koches, general counsel of Ocwen Financial, a mortgage loan servicing company.

Currently, homeowners say that lenders aren’t granting enough loan modifications and that the modifications don’t do enough to help struggling homeowners, despite repeated prodding this past year by regulators, reports AP. According to data released last month, less than half of all loan modifications made at the end of last year resulted in reducing a homeowner’s mortgage payments by more than 10 percent.

While homeowners say mortgage modifications don’t go far enough, lenders say they have their hands full and are swamped with calls from distressed homeowners who need help avoiding foreclosure.

“You can’t wave a magic wand and make the loans suddenly modified,” said Sharga of RealtyTrac. “They’re all individual transactions.”

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“Not as many people as you would expect in these markets that were previously overheated are going to be able to avail themselves of the plan,” says Stan Humphries, vice president of data and analytics for Zillow (The Wall Street Journal (“Hardest Hit Markets Unlikely to Get Relief From Obama Rescue,” Feb. 24, 2009).

Nationally, according to Zillow’s data, only one in four homeowners meet the eligibility criteria of the stability initiative, suggesting that far fewer than the 9 million troubled homeowners the government estimates could be helped will ever receive help with their mortgages.

Under the federal government’s new housing plan, certain homeowners who are underwater on their mortgages would be able to get a mortgage loan modification subsidized by the government, while other homeowners who have little or no equity in their homes would be able to refinance their home loans. However, in order to qualify for refinancing, homeowners must have a loan-to-value ratio of 80 percent but no more than 105 percent on their first mortgage, the Wall Street Journal reports.

Those With “Jumbo” Mortgages Least Likely to Qualify Under Plan

To be eligible for loan modification under the administration’s housing stability plan, homeowners must also have home loans that are within the conforming limits eligible for backing from government lenders Fannie Mae and Freddie Mac.

Currently, these conforming limits are as high as $417,000 for most markets in the U.S., and capped at $625,000 for homes in the most expensive housing markets in the country. This effectively prohibits many homeowners with “jumbo” mortgages — those who have loans above those conforming limits, depending upon the market — from participating in the new government program.

For example, in the Los Angeles area, one of the worst housing markets in the nation, only 9 percent of homeowners are able to refinance under the new initiative, Zillow research shows. An additional 8 percent of homeowners have loan-to-value ratios that exceed 105 percent, and another 8 percent of homeowners meet the loan-to-value criteria but have jumbo loans that exceed the government’s conforming loan limits for the area.

Zillow’s data also indicates a similar trend in the Miami-Fort Lauderdale area, where only 17 percent of mortgage holders are eligible for refinancing. Of those homeowners who fail to qualify for refinancing, 25 percent of those homeowners have loans that exceed the 105 percent loan-to-value requirement, while 6 percent have jumbo loans.

While Humphries acknowledges that the administration’s plan is “certainly better than nothing,” the Zillow vice president said the housing plan’s limited impact on the country’s hardest-hit real estate markets could ultimately end up marginalizing the goals of the program.

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The proposed legislation, which would alter the current U.S. Bankruptcy Code and give bankruptcy court judges the power to provide mortgage relief to homeowners, will soon be debated by lawmakers in the House of Representatives.

Under the bill, judges could reduce the principal of the mortgage loan, extend the loan terms, or reduce the interest rate for families who have “run out of other options.” These judicial modifications would be limited to primary residences with mortgages owned or serviced by the government-owned lenders Fannie Mae or Freddie Mac.

“At a time when an estimated 6,600 American families are losing their homes to foreclosure every day, we welcome the Obama administration’s support for changes to existing bankruptcy laws that will allow for judicial modification of home mortgages,” said Cary Ebert, president of the National Association of Consumer Bankruptcy Attorneys.

“The Obama administration is the latest major player in this national debate to recognize the fact that judicial modification must be part of the solution to today’s worsening home mortgage foreclosure crisis,” she said.

New Law Could Help Homeowners Avoid Bankruptcy Court

Those who oppose the bill, referred to as “cramdown” legislation, say it would force lenders to accept loan modifications made by bankruptcy judges without being able to offer their own input. Lenders claim that it could increase their losses, which would be passed on to borrowers in the cost of future home loans.

“We are disappointed to see the president endorse bankruptcy as a means to help delinquent borrowers,” said David Kittle, chairman of the Mortgage Bankers Association.

Supporters contend that the legislation could be just what is needed to force lenders to start aggressively modifying mortgages and prevent hundreds of thousands of homeowners from ending up in bankruptcy court.

According to Samuel Gerdano, executive director of the American Bankruptcy Institute, there’s a good chance that the bill will go through.

“Economic circumstances have changed for the worse, and by all accounts, they’re going to continue to get worse,” Gerdano said. “The environment is such that politically and economically, the odds have never been better than now.”

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The Homeowner Affordability and Stability Plan is intended to help 9 million struggling homeowners remain in their homes by offering loan modifications or refinancing options. And the plan is expected to be coupled with a housing bill that would allow bankruptcy judges to modify mortgages in a controversial procedure known as a cramdown, a measure that still needs Congressional approval.

Obama unveiled the plan during a visit to Arizona, which had the third-highest number of home foreclosures last year.

The plan, which would provide necessary aid to struggling homeowners “without rewarding risky behavior or spending hundreds of billions of dollars,” is one of the government’s most ambitious efforts aimed at correcting the tanking housing market, writes Deborah Solomon of The Wall Street Journal (“Distressed Homeowners Get New Options in Plan,” Feb. 17, 2009).

The U.S. Treasury will be responsible for developing and implementing a uniform set of mortgage loan modification guidelines that will be implemented across the mortgage industry.

“In the end, all of us are paying a price for this home mortgage crisis,” Obama told the Arizona crowd. “And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself.”

Who It Helps

Lenders willing to modify or refinance home loans. The government will give lenders $1,000 for every home loan modification that they complete and could give lenders up to $1,000 in government funds each year (for a maximum of three years) that a homeowner with a modified loan doesn’t re-default. Lenders could also receive $1,500 if they modify the home loans of mortgage holders who are at-risk of falling behind on payments.

Homeowners who stay current on their modified loans. Homeowners who make on-time mortgage payments could receive up to $1,000 each year for five years, which would go straight toward reducing their principal balance.

Homeowners facing foreclosure. Three to 4 million homeowners who are delinquent on their mortgage loans or who have already received foreclosure notices may be eligible to have their loans modified.

Homeowners underwater on their mortgage. Four to 5 million homeowners who have Fannie Mae or Freddie Mac held or guaranteed home loans and who are current on their mortgage payments but owe more than 80 percent of their home’s value may be eligible to refinance.

Ways You Could Be Helped

Loan Modification: Provides government subsidies to lenders who bring down a homeowner’s monthly mortgage payment, either by reducing the interest rate or adjusting other terms, to 38 percent of the homeowner’s income. The government, matching dollar-for-dollar, will pay lenders to further lower a homeowner’s monthly mortgage payment to no more than 31 percent of the homeowner’s income. Lenders will also be able to adjust a homeowner’s principal balance with help from the Treasury.

Loan Refinance: Allows families who owe more than 80 percent of the value of their homes be able to refinance into a 15- or 30-year mortgage at a fixed rate near the market rate of 5 percent. Typically, lenders require homeowners to have 20 percent home equity to qualify for today’s low interest rates.

Bankruptcy Court Cramdowns: Allows bankruptcy judges to modify home loans during court proceedings by reducing the principal balance of the loan to the home’s current market value, a measure that experts say is the key to keeping homeowners from re-defaulting on their mortgages.

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Thrifts regulated by the government office have been asked to suspend foreclosures until President Obama’s administration finalizes a new $50 billion plan to help troubled homeowners.

One of the largest savings and loans overseen by the Office of Thrift Supervision, ING Direct, says it has already imposed a moratorium on foreclosures effective through the end of March. “We’re not living under normal circumstances and we have to act differently and help everybody to get by as well as possible,” said company spokeswoman Cathy MacFarlane.

Treasury Secretary Timothy Geithner said the Obama administration could unveil its $50 billion foreclosure initiative this week. Although consumer advocates and lawmakers support the government’s latest efforts to stem foreclosures, they were disappointed at both the delay of the program’s rollout and the lower-than-expected funds allocated for the plan.

Leaders Brainstorm Ways to End Foreclosure Crisis

To come up with foreclosure prevention solutions, Geithner and Shaun Donovan, secretary of the Department of Housing and Urban Development, sought the input of officials from nonprofits, banks, and industry groups during a meeting last week, The Washington Post reports.

One proposal that has received strong support involves the government purchasing troubled mortgages from lenders at a discount, and then enrolling homeowners in a loan modification program, said John Taylor, president of the National Community Reinvestment Coalition, a community-based organization that promotes access to affordable housing.

Another proposal, which backers say would stimulate the sagging housing industry, involves a tax credit for new homebuyers. Under the proposed program, which is estimated to cost the government $6.6 billion, first-time homebuyers would receive a tax credit equal to 10 percent of the value of the new home up to a maximum of $8,000. If homeowners sold the home within three years, they would be required to reimburse the government for the credit.

“The thing that was striking was the uniformity of support for the idea that we can no longer rely on a voluntary system” in which mortgage lenders lead the charge in the foreclosure prevention effort, Taylor said.

Obama’s plan is characterized as a “more aggressive version” of a mortgage loan modification plan implemented last year by government-owned lenders Fannie Mae and Freddie Mac that was criticized as falling far short of helping troubled homeowners. Advocates say they hope Obama’s new housing bailout bill, in whatever form it eventually takes, is implemented quickly and deals effectively with the foreclosure crisis.

“We want to get a plan as soon as possible because the delay is causing homeowners to suffer even more than they have,” said Pam Banks, policy counsel for Consumers Union, a consumer advocacy group. “Time is of the essence.”

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Short sales — in which mortgage lenders agree to allow a home to sell for less than what is owed on it and sometimes forgive the difference — characteristically take a long time to complete. Buyers and sellers usually have a difficult time reaching a sales price that the mortgage holder will agree to prior to an expiration of the sale agreement. Fannie Mae is hoping to remedy these problems by determining an acceptable price for homes before a buyer has been located.

Pilot Program Targets Hardest-Hit Markets

Barely a week into the new program, which began in late December and will continue for three months, 400 homes in the two test markets Orlando, Fla., and Phoenix had already met the two major qualifications for the program — they were serviced by Countrywide Financial Corp. and their list price was less than the mortgage’s remaining balance.

Borrowers in Phoenix and Orlando have been hit exceptionally hard by foreclosures. Through October of last year, Phoenix area home prices dropped 33 percent, the worst decline in the country, according to Standard and Poor’s/Case-Shiller home-price index. As of August 2008, approximately 29 percent of Arizona’s borrowers had negative equity, and an additional 6 percent of borrowers were on the brink of negative equity, reports First American CoreLogic, data provider.

“Values have come down so far that everybody here’s upside-down,” said Ron Leis, a real-estate broker. “Until we can come up with approved sales, we’re stuck selling foreclosures.”

Short Sales May Help Stem Losses

Fannie Mae hopes that with so many foreclosures currently on the market and many more on their way, its pilot program will prove successful enough to be implemented nationwide and will help the company cut its losses from homes sold through foreclosure.

Lenders generally only lose about 19 percent on short sales, compared to a 40-percent loss if a home is sold after a lender forecloses on it, according to an analysis by Clayton Holdings Inc., which tracks mortgage loans for real estate investors.

Kevin Brungardt, Fannie Mae’s Vice President for Servicing Management, said
“Fannie Mae’s goal is to make the short-sale process as fast as possible for homeowners in financial distress,” he said.

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The Fed’s new purchasing program will be overseen by The Federal Reserve Bank of New York, which will work with four investment managers — BlackRock Inc., Goldman Sachs Asset Management, PIMCO, and Wellington Management Co. — to purchase more than $500 billion in mortgage-backed securities from government–sponsored mortgage holders Fannie Mae and Freddie Mac.

This initiative to purchase securities came after the U.S. Treasury decided against its original plan to use its authority under the $700 billion bailout plan, the Troubled Asset Relief Program, to buy high-risk, subprime mortgage securities from the nation’s ailing banks. Treasury officials decided, instead, to use the money to invest directly in national banks whose books have been burdened by hundreds of billions of dollars in losses and write-downs.

The central bank says it plans to release further information about its new mortgage-securities purchases later this week. The Fed, of its own accord, had already bought nearly $100 billion dollars of mortgage-backed securities prior to the creation of the program.

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While you may not be able to do anything about your landlord’s delinquency, you can take steps to protect yourself and give yourself more time with a roof over your head while you make new living arrangements:

1. Find out who owns your mortgage. Beginning in January 2009, Fannie Mae, one of the nation’s largest mortgage holders, will give renters living in its foreclosed properties the option of either signing a new lease with Fannie Mae so renters can stay in the home until the property is sold, or choosing to receive financial assistance from Fannie Mae to move out of the home. Fellow mortgage giant Freddie Mac says it will unveil a similar program in a few weeks.If your mortgage is owned by another company, contact the lawyer or the lender listed on your eviction notice to let them know that you’re currently living in the property and ask them what your options are. Make sure you don’t allow them to bully you into moving out sooner than your state law stipulates.If you’re nervous about negotiating with the lender on your own, contact a local nonprofit housing counseling agency for help, or call the U.S. Department of Housing and Urban Development at 1-800-569-4287.
2. Call your local sheriff’s department. Ask them how long the foreclosure process in your county takes. Knowing your timeframe (some states give you as much as 60 to 90 days) will give you an accurate idea of how long you have to develop a back-up plan, says Robert Baker, education coordinator at Kansas-based Housing and Credit Counseling Inc.
3. Research the rental laws in your state. California and Illinois have recently passed legislation that gives renters a grace period of 30 days or more to stay in a foreclosed property after it has been sold. Other states are considering passing similar legislation.To look up your tenant rights online, go to www.hud.gov.

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Borrowers with a high credit score — 740 and higher — who have at least 20 percent equity in their home could see rates as low as 5.13 percent on a 30-year fixed-rate conforming mortgage, a mortgage that is not subprime, says Lou Barnes, a mortgage banker in Boulder, Colo., and they wouldn’t be charged points or an origination fee (“Mortgage Rate Hits a 4-Year Low at 5.47%,” The Wall Street Journal, Dec. 12, 2008).

Rates are so low that they may even tempt borrowers with credit scores between 660 and 700 to refinance, says Chris Freemott, a mortgage broker in Naperville, Ill., but, he warns, these borrowers could wind up paying as much as half a percentage point more than borrowers with higher credit scores. These less creditworthy borrowers would also likely get hit with extra charges levied by Fannie Mae and Freddie Mac, two of the nation’s largest mortgage holders.

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