The Homeowner Affordability and Stability Act of 2009 (The Obama Plan)

The new "Obama Plan" is a well intended effort to stop the avalanche of foreclosures that are destroying our economy.

The popularly named "Obama Plan" is actually the Treasury department's regulations on the spending of up to $75 billion of the $700 billion dollar TARP (Troubled Assets Recovery Program) funds, approved last year for the so called "bank bailout." A portion of these funds will go to Fannie Mae and Freddie Mac to refinance loans that they presently own. Most of the rest will go to a "matching program" to encourage holders of loans to modify them.

Right now holders often do not want to modify loans as they feel it is too expensive (despite the fact that we can prove it is much less expensive than foreclosure). In truth, the problem was not so much the holders, but the servicers who could not handle the administration of modifications. So, the problem was twofold.

This program makes it less expensive for the holder to modify the loans to a lower payment by having the government match some portion of the amount of the holders' lost income. It also gives incentive payments to the servicers to modify loans.

Both of these are truly noble efforts, but they likely will not help most homeowners.

Here is why many will still need help, even after the Obama Plan:

People will not qualify who: Need too much help in terms of payment reductions (as the government caps the amount based on a formula of mortgage payments to income); need a temporary forbearance in payments, have income not provable by tax returns and pay stubs; have two mortgages on the property, are not primary residences and a few other requirements. That may disqualify up to 50% of all homes facing foreclosure.

Even if they qualify, the plan is voluntary for most holders, other than Fannie Mae and Freddie Mac. Unless a lender accepts new (not previously given) TARP funds, it is not forced to participate.

A huge percentage of loans that are in trouble are held by entities that do not have to participate or do not want to spend too much on any one modification. Plus, under this plan, the holder will not consider the individual homeowners' total budget. Many people, with larger families and other debt, need their mortgage payments down to under 31%, which is where the Obama plan stops. With our experience, we've found that around 50% of homeowners need to go beneath 31%.

The biggest problem is that desperate homeowners will think that they just apply and get the right modification. It will take a minimum of 60 and a likely 90 to 120 days for the servicers to process these applications due to sheer volume and many new and untrained staff. At end, the almost 80% of homeowners who do not qualify or still cannot afford the modified payment, will have nowhere left to turn. It will be too late for any attorney, counselor or modification company to help. This is akin to playing Russian Roulette with 6 bullets in an 8 chambered gun!

Finally, the modified mortgage is a 5 year fixed rate loan that then adjusts to whatever the then present conventional interest rate is.

The best thing to do is to have professionals handle modifications (using the Obama plan and much more) who work with senior level teams of negotiators and do not have to deal with the legions of new and untrained employees of servicers. The Obama plan can be used in a negotiation, but a better result may be obtained without it. Using unlawful practices of lenders as a lever to force negotiation, is still the best way to obtain modifications that each family can afford. Especially when the payment amount is guaranteed, this is a much safer way to obtain a modification than playing Russian Roulette with your home.

The easiest and fastest way to receive help on examining this option is to complete the evaluation form on this page.