Lisa Barton

Three issues that are central to distressed homeowners are addressed in the HASP. First, many homeowners find themselves unable to refinance high interest rate loans owned or guaranteed by Fannie Mae or Freddie Mac becomes their homes have lost so much value in the declining real estate market. Secondly, some homeowners who are current on their payments are seeing a much larger part of their income going towards meeting loan debt. Finally, recent low mortgage rates could spike up again unless there is confidence in the market that the Treasury Department will increase its funding commitment to Fannie Mae and Freddie Mac.

The Homeowner Affordability & Stability plan addresses all the issues raised above. Perhaps most importantly it provides an avenue of refinancing for homeowners who took out conforming loans, but are left with high loan to value ratios(LTVs) as a result of declining home prices. According to a recently released analysis by Greenwich Capital, “under current agency rules, most borrowers with over 80 LTV mortgages have a difficult time refinancing. 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.” They estimate that 15% of conforming balance FNMA pools could be newly eligible for refinancing under the relaxed criteria.

The Plan also creates a $75 billion stability initiative whose chief feature is a loan modification program that would reduce a borrower’s payment to as low as 31% of their income. The plan will include households at risk of imminent default despite being current on their mortgage payments. While the technical details are somewhat complicated, the burden of reducing the debt-to-income ratios will be shared between the existing lender and the government, in an effort to reduce homeowners monthly payments. Incentives are offered to both banks and individuals involved to maintain current payment histories.

Finally, using funds already authorized in 2008 for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to help maintain mortgage affordability. Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion, as well as continuing to buy mortgage backed securities.

Many pundits have commented that the current financial crisis will not go away until the underlying problems with the housing market are addressed. All of the components of the Homeowner Affordability and Stability Plan are designed to do just that and are a positive first step that should help struggling homeowners, while also assisting new home-buyers by keeping interest rates low.