The federal government recently unveiled a new plan to help stop the foreclosure crisis in this country. Being dubbed “Obama’s Foreclosure Plan” (officially – Homeowner Affordability and Stability Plan), this new bill is aimed at helping millions of homeowners who face the potential of foreclosure. There are two different types of homeowners this new legislation is hoping to assist; people who owe more on their mortgage than their home is worth and the unemployed who need a break on their payments.
The first category of candidates for this foreclosure plan is those homeowners who owe more money on their mortgage than what their home is currently worth. More than 15 million homeowners fall into this category, according to Moody’s analytics. About 10 million of them owe at least 20% more than their home’s current value. Under this new bill their mortgage companies can cut the total amount they owe, or they can refinance into loans backed by the Federal Housing Administration. The FHA is set to receive $14 billion in incentive money from the federal bailout fund to assist these homeowners.
The other type of homeowner this new foreclosure plan aims to help are people who are currently unemployed and need a break from their monthly payments. People receiving unemployment benefits would have their mortgage payments cut to no more than 31% of their monthly income for 3 to 6 months. This cut back is intended to give homeowners more time to find a job. Once they do find work they may qualify for a loan modification that would permanently reduce their payments under the administration’s existing $75 billion loan modification plan.
This new foreclosure plan aims to help 3 to 4 million homeowners avoid foreclosure, which is the same amount of people that were targeted with the original plan last year. However, even with these changes many economists are predicting that no more than 1.5 million homeowners will prevent foreclosure. Usually these types of plans are much more difficult than we think. A lack of planning and shifting rules on who qualifies for federal assistance were the main reasons why the initial foreclosure plan did not pan out. Only time will tell if the changes that have been made to that original plan will actually help as many homeowners as the federal government anticipates.