New Mortgage-Related Assistance May Bring Relief To U.S. Homeowners

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On Tuesday, the Bush administration made public a new program aiming to modify mortgages and set back on track the U.S. real estate market. However, experts in the financial sector have been quick to point out that the program is flawed and does not benefit homeowners to the extent that it should, given the current economic crisis.

The new plan focuses on Freddie Mac and Fannie Mae, the mortgage giants that were taken over by the Federal Government in September. Between the two companies they either own or back around 31 million mortgages with a value of around $5 trillion. Eligibility for assistance is determined by a number of factors, including that homeowners must be 90 days or more in arrears with their mortgage payments, must still owe at least 90 percent of the current value of their home, must be living in the home that the mortgage applies to, and must not have filed for bankruptcy. The level of assistance offered to eligible homeowners is that monthly mortgage payments would be adjusted to a level below 38 percent of monthly household income. This would be done by either adjusting interest rates or increasing the term of the loan. The decreased interest rate would remain in effect for five years, after which it could be increased to an agreed and predetermined level, while the term of the loan could be extended to 40 years. Although these standards would apply to loans owned and guaranteed by Freddie Mac and Fannie Mae, officials are hopeful that they will be adopted throughout the home loan industry.

What about homeowners who have been diligently paying their mortgages, often having to make huge sacrifices in the family budget to do so? With the new package from the Bush administration, homeowners have to ruin their credit record before they become eligible for assistance. Citigroup has decided to launch a pre-emptive campaign, encouraging borrowers who are battling to make their payments to approach the company to renegotiate their loans. While not publicizing the fact in the manner that Citigroup has chosen to do, other banks are also open to negotiating with borrowers to prevent default on mortgages and subsequent foreclosure on their homes. Borrowers who are looking for assistance in this way need to be living in the home that the mortgage relates to, the mortgage must be on the books of the bank, and homeowners will need to disclose household income and expenditure to prove just how cash-strapped they are, bearing in mind that a bank may consider a household overburdened if more than 40 percent of their income is being spent on housing costs.

These measures to assist homeowners are seen by many as not the perfect solution, but certainly a step in the right direction. It is worth noting though, that the actual balance of the loan will not be altered, and sooner or later lenders will expect to recoup the entire loan amount. Therefore, homeowners who find they owe more on their house than it is actually worth may rethink whether it is worth holding onto the house at all. With mortgage-related debt being one of the major contributing factors to the financial crisis engulfing the country, investors and other stock market players will no doubt be interested to see what effect these measures will have.

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