Stimulus Package: The Sequel (This One Might Work!)

“The Decider” finally decided to support the new $300B housing rescue bill. The bill is actually an attempt at bailing out and reigning in Fannie Mae and Freddie Mac, the mortgage giants that back or own $5 trillion in U.S. mortgages — nearly half the nation’s total. Housing rescue bill at careersthatdontsuck.com

While that’s a worthy enough goal (since not doing it would plunge us even further into this recession), the bill goes a step further–to bail out homeowners.

If the bill is passed, up to two million at-risk borrowers will be able to refinance their existing mortgages into new, low-cost fixed-rate loans (no ARMs) insured by the Federal Housing Administration (FHA). Borrowers stand to save as much as 40% over their current loans.

In exchange for agreeing to re-work their loans, writing down the value of the loan to 90% of the home’s current value, accepting substantially smaller payoffs, writing off loan fees and penalties, and avoiding the costly and often fruitless foreclosure process, lenders could walk away from bad loans.

Other goodies in the bill include $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time home buyers (those who bought homes between April 9, 2008, and July 1, 2009). It also allows taxpayers who have paid off their mortgages to claim a $500-$1,000 deduction on their 2008 property taxes.

Who’s Eligible?

The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program.

To qualify, you must:

Live in your home (Can’t be a rental or second home)
Participate in a new appraisal
Have loans that were issued between January 2005 and June 2007
Be spending at least 40% of their gross monthly income on debt
Demonstrate your inability to keep paying your existing mortgage (based on examination/verification of income statements, bank accounts, job histories and credit scores)
Retire any other debt on the home, i.e. home equity loans, lines of credit or liens
Need a loan of no more than $625,000

Note: Borrowers can be current or in default on their current loans

Applying

To start the process, contact your current mortgage company or go directly to an FHA-approved lender
The Catch

Mortgage companies must voluntarily agree to re-work and write down the loans and pay a 3% up-front premium to participate in the program, something they won’t do if they believe they can get more by going through the foreclosure process.

Borrowers must pay origination fees to the lender (though they can be spread over the life of the loan)

Borrowers must pay the FHA an insurance premium of (1.5% of principal) annually to guarantee the loan.

Borrowers must agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. The FHA’s share of the profits decreases by 10% each year, so you’ll only them 70% of the profit if you sell or refinance after 3 years. Additionally, borrowers must also pay an exit fee (3% of mortgage principal).

Borrowers cannot take out a home equity loan for at least 5 years, and then their total debt cannot exceed 95% of the home’s appraised value at the time of the loan.

The Back-Up Plan