For many people in this recession, their American dream of owning their own home has turned into a nightmare. They may owe more than the house is worth, they may not have the income to pay their high interest housing debt, or they face a balloon payment that they cannot hope to pay.
It should be clear that the bank that issued the original mortgage in many cases no longer owns the investment; they only service the debt. They accept payments from the homeowner, pay taxes and other obligations, and forward the remainder to the debt owner.
However, for mortgages owned by the two government homeowner-financing agencies, Fannie Mae and Freddy Mac, the Treasury Department started a Making Homes Affordable initiative with two components, the Home Affordable Refinance Program (HARP), and the Home Affordable Modification Program (HAMP).
HARP allows homeowners relief who have remained current on their mortgages by allowing them to refinance their mortgage up to 125 percent of the appraised value of their home at current mortgage rates.
HAMP encourages any investor or servicing company to participate with financial incentives for loan modified through reduction of interest, extension of term to a maximum of 40 years, and forgiveness of balloon payments. The goal is to bring principal, interest, insurance, association dues and PMI to below 31 percent of the verifiable household income. There is a 90-day trial period before permanent modification is granted.
Now, Fannie Mae has announced a new program for those homeowners on the brink of foreclosure who do not qualify for the HAMP plan. In exchange for transferring ownership to Fannie Mae, the homeowner will be allowed to rent their homes and lessen the credit rating impact of foreclosure. Fannie Mae will make available to the homeowner a 12-month lease with month-to-month extensions when it expires and will not market the house until after the initial 12 months.
Rents will be determined by a private management company and market conditions. Former homeowners will have to qualify to stay with rent set at 31 percent of their pre-tax income or less.
Freddie Mac already has a similar program in place, but foreclosure must be completed and only month-to-month leases are offered.
Both these programs are designed to allow the homeowners to stay in their homes for a reasonable period and stabilize neighborhoods. The thinking is that it is difficult to market homes in neighborhoods with scores of empty and sometimes vandalized homes. Even though people are renting, they will tend to care for the home they used to own.
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