A government sponsored program to renegotiate Fannie Mae and Freddie Mac loans is set to take effect December 15th. Fannie and Freddie own or guarantee 31 million mortgages, yet the government cannot or will not, estimate how many people will receive mortgage relief. Rather than pose a simple test based on delinquency, the government program requires homeowner’s measure up to the following standards:
- The program is limited to owner occupied homes.
- Debtors in bankruptcy are not eligible.
- The owner must be at least 3 months delinquent.
- The owner cannot have more than 10 per cent equity in the property.
Benefits are limited to extending the loan duration from 30 years to 40 years; reducing the interest rate based on income; and a possible interest-free deferral of a portion of the mortgage balance. Other than reducing the interest rate, the program offers little substance. A person who cannot pay a 30 year mortgage will gain very little by extending the duration on an upside down loan. The bank actually earns another 10 years of interest during that time. Slumping housing prices can easily and quickly eliminate the 10 percent equity cushion, sending most loans underwater, leaving most participants paying more than the home is worth.
