Thursday, April 26, 2018

Q&A on Obama administration's mortgage-aid plan

WASHINGTON — The Obama administration is offering some relief to military service members, veterans and homeowners who have government-backed mortgages. Under a program President Barack Obama unveiled at a news conference Tuesday, the government would cut the fees it charges to insure those borrowers.

The idea is that lower fees would persuade millions to refinance their loans while interest rates are near record lows. It's the administration's latest attempt to minimize the damage from the foreclosure crisis and help more people keep their homes.

For service members and veterans, Obama says major lenders will review foreclosures or denials of lower interest rates. If wrongly foreclosed upon, service members will be paid their lost equity and receive additional compensation.

What has the administration proposed?

Borrowers with mortgages insured by the Federal Housing Administration could refinance at half the current fee. A lower fee would follow years of rising mortgage insurance premiums. FHA is also reducing an up-front premium when it initiates a loan. The FHA charges the fees on top of standard interest rates because it backs riskier borrowers.

Who's eligible?

The administration estimates 2 million to 3 million homeowners. Most are first-time or low-income home buyers. The FHA requires only a 3.5 percent down payment. And borrowers don't have to prove that they're employed. FHA borrowers can also refinance even if they're "underwater," or owe more on their mortgage than their home is worth.

How much will those who get the reduced fees actually benefit?

The fee is now 1.15 percent of the mortgage balance each year. Those fees are unappealing to many borrowers who want to refinance. The plan would cut the fee to 0.55 percent. The current up-front premium would also be lowered, from 1 percent of the loan balance to .01 percent. As a result, a borrower who owed $175,000 on their mortgage could save about $1,750 in one-time fees and more than $1,000 per year in annual fees by refinancing. The borrower could save nearly $150 a month more if the interest rate declined from 5 to 4 percent.

How will military service members be helped?

The administration has struck an agreement with various banks and lenders to conduct a review of foreclosure practices for military members. Any service member or veteran whose home has been wrongly foreclosed on since 2006 will receive compensation equal to a minimum of $116,785 plus any home equity lost since the foreclosure. This compensation will come from the mortgage servicers who conducted the foreclosures. In addition, any service member who was wrongly denied the opportunity to refinance will receive a refund of money lost.

Will it work?

Possibly, if the reduced fees are well-advertised and borrowers are confident of saving on their mortgage payments by refinancing. If homeowners are wary of paying even a small amount to refinance, the program could fail to reach millions who are eligible. Economists said the lower fees are a modest way to help the troubled housing market but won't turn it around. Stan Humphries, chief economist at the real estate website Zillow.com, predicted that the separate plan to compensate military service members who were wrongfully foreclosed upon would be a big help to that group. It's unclear how many would benefit.

Information from the Washignton Post was used in this report.

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