Tuesday, March 10, 2009 - Article by: Lender411 Member
HASP - The Homeowner Affordability and Stability Plan - is designed to slow the foreclosure rate, stabilizing housing prices and saving the homes of many families. Those who are not yet behind in their mortgage payments, but know from doing their household budget that they may or probably will soon start falling behind, are eligible for help. There are expanded approval guidelines that take into account falling housing prices, allowing for higher LTV* ratios. Those that need even more help are eligible for below market interest rates from their current lenders that reduce their DTI** ratios to affordable levels.
Even if you are not in danger of loosing your home, if you have large numbers of foreclosures and short sales in your neighborhood, your home price is being dragged down in this environment. Even if you do not have foreclosures or short sales in our neighborhood, the banks and the entire economy are being hurt by prices falling so quickly and deeply. Irrational exuberance caused housing prices to overshoot to the upside. Now irrational fear is causing prices to fall rapidly and deeply to the downside. That is why this stabilization plan should help stabilize the entire economy, helping us all, not just those getting help under the program.
Not every homeowner can or should be saved from foreclosure. I blame Wall Street for being the enabler, allowing people with bad credit to purchase more home than they could afford, and watching them be true to their FICO score and default in large numbers, I know that you cannot save someone who is not willing or able to help save themselves. If your family income is $40,000 a year and you have a $400,000 mortgage, you have to find a more affordable home. If your FICO score is 500 and you have unpaid judgements and collections, you clearly have a long history of not paying your bills and need to establish a good payment history before a lender can be reasonably confident that you will pay THEM.
What if your family income was $120,000 and you bought a $300,000 home? That purchase was comfortably in the affordable range for you. But that was a 2 person household income, and each of you made about $60,000 a year, and one of you just got laid off. You could still afford the home by cutting back, OK, eliminating, luxuries and doing the financial equivalent of battening down the hatches. If you could refinance your mortgage that might have a note rate of 7% down to current rates as low as 5% or so, you'd save $385.44 a month. That would help a LOT. However, through no fault of your own, the home that you had 25% equity in when the market value was $300,000 is now worth $225,000. You now have NO equity in your home, so you cannot qualify under regular guidelines for a refinanced loan.
What if you bought your home at the top of the market with a no money down adjustable rate loan? That certainly sounds irresponsible today, but almost every lender was pushing such loans, there appeared to be no end in sight to rising housing prices, and everyone just KNEW that your home was the biggest wealth-creator a middle class family would have. The terms offered to borrowers were just too good to turn down. But in today's economy, you may not only have no equity in your home, you probably are upside down, owing more than the home is worth. You could ride that out if you don't plan on moving anytime soon, but your income is now not rising along with your note rate because the economy is so weak - which is to a large extent due to the housing crisis. You simply cannot afford to pay your mortgage under the original terms.
Families like the ones described above are the ones targeted for help under this HASP assistance. These people are not deadbeats and did not play the housing market as one might play the stock market. As long as the primary reason you cannot qualify for a new loan at a lower rates is either the drop in the value of your home, or an unforeseen problem with your family income, you can now refinance up to 105% of the home's new, lower market valuation or get your interest rate reduced to bring your DTI ratios down to an affordable level.
The part of the assistance plan that encourages lenders to modify loan terms, bringing a borrowers interest rate below the market rate, to as low as 2%, is much more controversial than the expanded LTV approval guidelines mentioned above. Borrowers only qualify for this assistance if they cannot qualify for a standard refinance at current market rates, even under the expanded LTV approval guidelines.
People like Rick Santelli of CNBC do not think that we should "subsidize the losers." Apparently some think it is OK to subsidize BANKS that are losers but not the PEOPLE who left no margin for error when taking out adjustable rate loans with little money down. They were optimistic in their beliefs that their incomes would rise slowly but consistently. The banks were optimistic that housing prices would keep rising. The banks AND the borrowers were unrealistic in their optimism, but the big "moral hazzard" argument is usually made to voice opposition to helping individuals. To be fair, some are more consistent and think we should not bail out people or companies. I do not agree because this is a near depression economic crisis, but I do respect their consistency. I do not respect those who would help companies but not people directly.
In summary, if your credit is still good and you can document your income, you can either qualify for approval of your refinance down to current market rates based on allowances for falling housing prices, resulting in expanded LTV approval guidelines, or if your DTI ratios are too high for approval under these expanded approval guidelines, you should be able to get your lender to bring down your interest rate to a level that results in your DTI ratios coming down to affordable levels.
You should contact your lender if you already know you need your loan terms modified. Tell them to put you through their hardship test. I call this qualifying for a loan in reverse, or disqualifying yourself for your current loan, since you are showing that you CANNOT afford the current loan terms.
*LTV stands for Loan to Value. The traditional guidelines call for a borrower to have at least 20% equity in their home, with the bank loaning the other 80%.
**DTI stands for Debt to Income. The traditional guidelines call for a borrower to spend no more than 29% to 31% of their gross income on their monthly mortgage payment, and no more than 43% on all debt - housing, car note, credit cards, etc.
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