Wikinvest Wire

Save thousands in California

Thursday, March 05, 2009

Treasury Department examples of how the new Homeowner Affordability and Stability Plan will slash mortgage payments are all well and good - a monthly savings of about $400 for a house purchased a few years back at just over $200,000 will mean a lot to many people - but what kind of savings might be seen in former real estate hot spots such as California where, just a few years ago, the median house price was a half million dollars?

As shown below, some Californians might stand to save thousands of dollars a month and, as was the case back in 2005, the fact that the half million dollar house might be worth only $250,000 doesn't seem to matter.
IMAGE The table above assumes a household income of $80,000 which means that the new maximum allowed 31 percent mortgage payment (including Principal, Interest, Taxes, and Insurance) is $2,067. This appears in the top row and is based on a 40-year mortgage, because you can't get there with anything other than that, even at two percent.

The four rows underneath indicate monthly payments based on 30-year loans at various interest rates assuming a 2005-era original loan amount of a half million dollars. The monthly savings achieved with the new loan are shown in the right-most column.

Principal reduction is omitted from this discussion, something that could add even more savings on top of what is shown above.


Walker said...

Those loan amounts are Jumbo loans, which F&F do not support. Does the refinancing act even apply to these kind of loans?

Tim said...

The limit in California is over $700,000.

Anonymous said...

What is amazing about this is the sheeple are being told, "Forget about the fact that you still owe $500,000 and you're $250,000 house is not likely to regain that level in your lifetime -- we're going to lower your payments". I think people are wising up to that.

Tim said...

This report in today's WSJ has a very similar case to the one I talked about above. The homeowner will save $1,700 per month if it goes through:

Nelia Price stopped making mortgage payments in December, after struggling for months to make payments on her option adjustable-rate mortgage. The monthly payments on the $420,000 mortgage began at less than $2,000 and gradually increased to $3,000. She hopes that by missing her payments, her bank will modify her loan. The value of her four-bedroom home in Modesto, Calif., has declined to around $250,000 since 2005 when she paid $465,000.

Ms. Price, a 50-year old real-estate agent and single mother, was able to enter a one-year loan modification in August 2007 that set her monthly payment at a fixed-rate. But her bank wouldn't extend the modification when it expired last summer. "They said they couldn't help me because I was current on my payments," she says. "I told them, 'That's ridiculous. I don't want to ruin my credit score.'"

While Ms. Price could be eligible for a government-subsidized loan modification, which is targeted to borrowers who received exotic loans with teaser rates, that provision would last for only five years and relies on the voluntary participation of her lender and servicer. Under that program, the government would share the cost of reducing monthly mortgage payments to 31% of a borrowers' income if the first mortgage holder reduces the loan to 38%. That would require her bank to sharply reduce the mortgage payment, because her mortgage payment has grown to $3,000 while her monthly income has fallen to around $4,000, around half of what it was two years ago. "It'd be nice to get the help," says Ms. Price, "but I'm not sure what Obama can do about this."

RESULT: She's eligible for a loan modification, but whether she receives one will depend upon her lender's willingness to participate. If the lender goes along, her monthly payments could fall to about $1,300 a month for five years.

Anonymous said...

What doesn't everyone play chicken with these banks and just stop paying their mortgage? National mortgage strike year!

Anonymous said...

The commenter above has it correct. We need to organize into homeowners unions, and use the power of collective bargaining.

The "housing industry" has well-paid lobbiests presurring government to cater to its needs. Who is representing the common person here?

donny said...

Even if a house is in negative territory, all that's really necessary is that carrying costs be less than market rents. There's going to be a lot of people renting out homes under the table in a few years, assuming this plan works.
Principal reduction would only raise the specter of people one day actually wanting to sell their houses. If they just extend this program way into the future, they can keep houses off the market indefinitely. ;)

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