Will Obama’s Housing Rescue Plan Work?

Obama is making an effort to rekindle the housing market, and here is a good article outlining his propose plan.

I think the housing market is the key to jumpstarting our economy again. Everyone is focusing on the financial services and auto industry, but I think the real estate industry is the key to an economic recovery. I don’t like the idea of bailing out people, not because I don’t have a heart, but because buying a home is a risk. Failure is not always such a bad thing. Anyway, we are going to bail them out, and we’ll see how Americans respond to this gift.

Who will ths plan help?

For the most part, it will help those who have already defaulted on their loans. Lenders will have the ability to restructure the loan by reducing the interest rate and possibly the principal amount. They will try to reduce your loan payment to 31% of your household income. Obama says that this plan will weed out helping those who could never afford owning a home in the first place, because they will not restructure a loan that offers no plausible way to make the payment affordable based on the borrower’s income.

The mortgage must have originated before Jan. 1, 2009, and the unpaid principal can amount to no more than $729,750 for a single family home (more for a home with two-to-four units). Borrowers with other debt, such as car loans and credit cards, exceeding 55% of their incomes, may still qualify for a modification, but they’ll be required to accept debt counseling in a HUD-certified program.

Obama also claims there will be relief for some people that are unable to refinance their home, because they are upside down on their mortgage. I think this will be the minority of people that get relief from this package, because they will allow a refinance up to 105% of the value of the home. I know that many people are about 10% to 15% upside down on their homes, so I am not sure how many people this will help.

Who is not eligible?

If your house value has dropped more than 5%, you are out of luck.

How Do You Get Help?

Start calling your lender. Explain to them that you want help restructuring your mortgage and go from there. If they give you a hard time, refer to Obama’s plan and explain that you qualify for help.

Is there a catch to all of this?

Kind of. The restructured loan payment amount will only last for about 5 years, and then the loan will revert back to the original loan terms after that.

The reduced payment would stay the same for five years and then gradually revert back to the conforming loan rates in place at the time of the modification, increasing by no more than 1% a year.

I hope this works, because if more people start making their payments and confidence is restored in the housing market, we will see the financial services industry and the real estate industry make a rebound over the next 12 to 18 months.