President Barack Obama revealed his much anticipated plan to fight the housing crisis by proposing to spend almost $300 billion to shore up the housing market and stem the onslaught of foreclosures. The plan calls for assisting almost 9 million homeowners that include those in the foreclosure process and those who are current on their payments yet fearful that they may fall into foreclosure for any number of reasons. This plan provides some relief if lenders and servicers agree to modify the terms of the existing loans. For anyone that has attempted to contact their servicer in the last six months, they are finding a maze of contacts and spending an extraordinary amount of time to find the right person and then have to wait indefinitely on modification decisions. For some of the consumers, they are not only in the foreclosure process with a looming court date and/or sheriff sale over their heads but have the added agony of waiting on the lender or servicer to make a decision that may or may not allow them to stay in their home.
If we assume that one third of the proposed 9 million homeowners that will be helped by the plan are over 55 and would be classified as “responsible” (Obama speak for non-speculators), we can imagine that a significant portion of that segment falls into one of the following:
- retired on fixed income, social security or savings
- retired on fixed income but looking for part-time or full-time work because their money is running out or cannot cover current costs
- not retired but having financial hardship
Part of the Obama proposal calls for:
- Lenders must agree to cut interest rates so monthly payments are no more than 38 percent of a borrower’s income. The Treasury will match those reductions dollar-for-dollar to bring down payments to 31 percent of income.
- Borrowers with high total debt obligations exceeding 55 percent of their income must enter consumer debt counseling to help reduce car, credit card and other debt to receive mortgage modifications
- Program targets owner-occupants with high mortgage debt compared to income or those with “underwater” mortgages that exceed the value of their homes. Borrowers don’t have to miss payments to qualify.
- The modifications must stay in place for at least 5 years
The struggle with the groups and the bullet points above is that this demographic is at the end of their careers or have finished and have a limited / fixed income or no income at all. By modifying the mortgage payments for this particular demographic are we prolonging the inevitable where the borrower will have to leave his or her home? What about a senior who did a no-doc, cash-out refinance because they needed money and was this “responsible”? Others might immediately think that a reverse mortgage might be the answer for the servicer and senior……that answer is yes (typically) if the borrower has at least 50% equity. Depending on their age and other circumstances, any amount of equity less than 50% in their property makes a reverse mortgage practically impossible. Even though the administration has stated that guidelines will be issued on procedures to underwrite these modifications, special consideration should be taken for elderly borrowers to prevent any discrimination based upon age, income and health (think medical collections on a credit report). These are just some of the thoughts that come to mind with modification of mortgages and the senior population that might be facing or fearing a foreclosure.
The Obama plan will certainly help some homeowners keep foreclosure at bay but raises some unique challenges for senior homeowners with mortgages. We’ll see how flexible some of the servicers are when the plan is implemented. Unless the administration wants to see some bad press about seniors getting evicted from their homes because the lenders wouldn’t modify their mortgages, they might want to consider some of these items in those forthcoming standards yet to be published.