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Still Confused by whether the President’s “Making Home Affordable Plan” will help you? We asked Quicken Loans Chief Economist Bob Walters to decipher the loan modification and refinance plan.

If you’re like everyone else in America, you’ve probably heard about the President’s recently unveiled plan to help millions of homeowners to refinance or modify their mortgages.

However, despite plenty of news coverage, many Americans (and even a fair share of mortgage lenders and financial reporters) are still scratching their heads over exactly who the plan is for and how it works.

So we decided to ask Bob Walters, Chief Economist here at Quicken Loans, to help you decode the Obama housing plan and make better decisions about what to do next when it comes to refinancing.

Bob was one of the economists and banking leaders on the conference call when the government rolled out the plan on Wednesday, March 4, 2009. He’s been poring over the official documentation ever since. Today, he gives his run-down of what you need to know.

What Exactly is The Obama Housing Plan and Does It Benefit Me?
Bob Walters, Chief Economist, Quicken Loans

The “Making Home Affordable Plan” was created to help two groups of homeowners:

  1. People who are making their mortgage payments, but were unable to qualify for refinancing in the past because they owe more on their house than it’s currently worth.
  2. People who are at risk for imminent foreclosure.

Let’s take a quick look at what the government is doing for each of these groups. If you’re like 90% of Americans and have been responsibly paying your mortgage on time, you qualify for already historically low mortgage rates, and you can jump ahead to the third scenario.

Situation One: You owe more on your home than it’s worth.

If you owe more than your home is worth (also known as negative equity or “being underwater”), the new Obama housing plan offers a special refinancing program known as the Home Affordable Refinance Plan. (This plan is called DU Refi Plus™ at Fannie Mae and Relief RefinanceSM at Freddie Mac.)

This program will allow more than 5 million people who didn’t qualify for a mortgage in the past to refinance. To qualify:

  • You need to have a Fannie Mae or Freddie Mac mortgage.
  • You need to have satisfactory credit.
  • You can now have up to 105% loan-to-value (meaning you can now owe as much as 105% of your home’s current value).
  • You can’t refinance for more than the amount of the mortgage (no cash out).

A few other things to know:

  • If your current loan doesn’t have PMI (Private Mortgage Insurance), then PMI will NOT be required on the new loan.
  • This program differs from a “regular refi” by benefitting:
    • People who cannot qualify for a traditional refi because they do not have enough equity.
    • People who would have had to pay Private Mortgage Insurance with a traditional refi.

Situation Two: You are in default on your mortgage or in imminent danger of default

If you are having problems making your payments and are at risk of foreclosure, the plan provides a special loan modification program for troubled homeowners.

A loan modification is exactly what it sounds like – a lender modifies the terms of your original loan, typically to reduce your interest rate or payment. In this program, your mortgage rate would be reduced for five years.

Loan modification programs have existed for some time now, but have, in general, been failures. The government is trying to correct this by creating specific requirements and a more rigorous process behind loan modifications.

It’s important to note that the loan modification program in this plan is intended to help keep the most troubled homeowners in their homes. It is not for people who can currently pay their mortgages. The new requirements are very specific.

To qualify for a loan modification, you will have to:

  • Prove in writing that you have a serious hardship that is preventing you from making your mortgage payment, or that your income has dropped significantly, or your rate or payment increased drastically.
  • Document all of your personal expenses, income and assets, to prove that you are unable to pay your mortgage.
  • Depending on your situation, you may be required to receive financial counseling as a condition of participating in the program.

A few other things to know:

  • The loan modification doesn’t necessarily reduce principal, and if you sell or eventually refinance the house, you may still have to pay off the balance.
  • If you’re in a situation where you are in default or at risk of default, it may help you keep your home by:
    • Reducing your interest rate (as low as 2%).
    • Extending the term of your loan up to 40 years.
    • Allowing you to forbear principal.

If you think you qualify for a loan modification, you’ll need to work directly with the servicer of your loan.

Situation Three: You can currently qualify for a refinance

If you’re like 90% of Americans who’ve been paying your mortgage on time, you can benefit from some of the lowest mortgage rates in history. The Fed has been taking action to keep rates as low as possible. However, their ability to control mortgage rates is limited.

If you held off pulling the trigger on a refinance until the details of the administration’s housing plan were made public, it’s time to revisit your mortgage right away. While rates continue to be low, they could change at any time, so waiting any longer could cost you money.

Bob Walters is Chief Economist at Quicken Loans, the nation’s #1 online mortgage lender, and is often quoted on mortgage and personal finance issues by media including CNN, Wall Street Journal, New York Times, USA Today, Reuters, Dow Jones, Bloomberg, MarketWatch, and others.

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