Obama’s Mortgage Relief Plan: What Is It? Can It Work?

The Obama mortgage relief bill was passed and the plan is now active and online at www.makinghomeaffordable.gov.

The web site includes a short online quiz that will help visitors determine if they are eligible for the program, and it also includes information about the program, how it works, and instructions on how to make an appointment with a HUD-approved housing counselor to discuss a borrowers personal situation at no charge.

Visitors to the site are encouraged to meet with a HUD counselor even if they are not eligible for the mortgage relief program. HUD-approved counselors meet with homeowners who are in trouble with their mortgages at no charge and refer them to appropriate government agencies, make suggestions and give advice, and can even contact a lender on a borrower's behalf.

Can the new mortgage relief program really make a dent in the wave of foreclosures currently decimating American cities? What does the program mean to foreigners interested in buying investment property in the U.S.?

The program is aimed at borrowers who could benefit from a loan modification and a lower monthly payment but who are unable to obtain one because they are slightly underwater on their current mortgage, or because their marginal credit (or the frozen credit market) makes refinancing impossible. Candidates for the program must use the property in question as their primary residence, must be no more than 30 days past due on any payments for the past 12 months, and the mortgage they currently have must be backed by Fannie Mae or Freddie Mac. (The government web site allows users to quickly check whether or not their mortgage is backed by either entity.)

Once a borrower qualifies for the program, the lender first voluntarily reworks the loan to get the mortgage payment down to 38% of gross monthly income. Then the U.S. government takes the payment down even further to 31% of gross monthly income and sends the bank a check for the 7% difference. It's that "sends the bank a check" feature that is intended to provide incentive for the original lender to participate.

Unfortunately, unless the lender has already accepted federal bailout funds, participation in the program cannot be forced. In other words, a borrower could conceivably qualify for the mortgage relief program and the lender could still refuse to participate and foreclose on the property anyway. In the past, mortgage lenders have been notoriously reluctant to agree to loan modifications, and so far it is unclear whether the new government incentives will be enough to change their minds.

A bigger problem is the narrow focus of the program.

The real problem is not so much people who live in their homes and are paying their loans on time but can't get refinancing. The real problem is the sheer number of crazy subprime mortgages going into default (not eligible due to late payments), the avalanche of deeply underwater loans (not eligible because the amount mortgaged cannot greatly exceed the home's current value), the backlog of homes purchases by investors who have already defaulted, and the huge number of homes that are currently on the market that are not the borrowers primary residence and are worth a fraction of the amount mortgaged.

According the Making Home Affordable web site, the Obama plan hopes to reach 7 to 9 million borrowers, but whether or not it will help that many people remains to be seen. Although it is at least something, it is not likely to turn anything around soon if ever.

Until the backlog of foreclosed homes and homes with sellers in default is cleared and the price of homes in the U.S. stabilizes, the most recent attempt on the part of the federal government to stop foreclosures is likely to be a drop in an awfully big bucket.

What that mostly means for the foreign investor is this:

More watching, more waiting. Caveat Emptor.