Wednesday, February 18, 2009

A look at the Mortgage plan

Complicated stuff, but Andre Jakabovics and David Abromowitz provide a good explaination of the plan.

Here are some highlights I gleaned from the article.

The estimated $75B comes from Tarp II.

The plan allows Fannie and Freddie -- which have been fully nationalized -- to refinance the mortgages they have already acquired from lenders to 105% of home value (previously they could only refinance 80% of home value)to those otherwise credit worthy. The purpose is to allow refinancing for people whose equity had disappeared with falling home prices. This portion will have little costs as program costs will be offset by foreclosure savings.

The plan provides for the reducing of mortgage payments for 'at risk borrowers' in two stages to get to 31% of income. The lender must take the full loss to adjust the payment down to 38%, at which time the Gov't will 'pay half the difference' to reduce the payment to 31%. Lenders will receive incentives to participate in the program. These are an up-front payment of $1,000 for making modifications, and $1,000 per year for three years, as long as the borrower remains current. In addition, the government will pay $1,000 annually toward the outstanding principal balance for up to five years if the borrower remains current. This is where the bulk of the costs will be incurred.

All recipients of TARP funds will be required to participate, which includes the nations largest mortgage lenders including Bank of America (who bought Countrywide), Wells Fargo, Chase and Citimortgage.

Finally, the admin will seek legislation to allow bankruptcy courts to modify primary residence mortgages.

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