The fight to stave off more foreclosures just got a much-needed idea! This past Friday, FDIC Chairwoman Sheila Bair revealed her strategy to assist 2.2 million borrowers’ secure new loans and ultimately help 1.5 million people keep their homes.

The proposal suggests that delinquent homeowners would get a much-needed shift in the amount of their mortgage payments. Those who are two months or more past due would have their payments shifted to a more manageable 31% of their gross monthly income under the terms of their new loans.
Additionally, the plan offers not only a financial incentive of paying loan providers $1000 for reworking mortgages, but also a strategy of the government sharing the financial burden that has previously scared off lenders from rolling up their sleeves and pitching in to help. Bair suggests that the government would take a 50% responsibility of the losses if a borrower taking advantage of the assistance defaults.

A similar plan has already been in effect — Bair has been using this strategy with IndyMac, the failed mortgage lender the FDIC took over in mid July. Although there are currently other proposals on the table, Bair has hoped that this one would be the winner.
The main differences between Bair’s plan and the current government options are that there would be no reduction of principal amount owed, and compensation would be allotted for the lenders who jump on board. Although the hopes were that lenders would join forces with the government and help out suffering homeowners, that $1000 cash bump could certainly assist them in a change of “heart” and subsequently, mortgage terms.

A new twist in the bailout strategy has been decided since Treasury Secretary Henry Paulson announced that the government is no longer going to focus on purchasing troubled mortgage assets. Originally, troubled mortgages were slated to receive a substantial portion of the financial rescue strategy. The newly freed-up resources are now going to focus specifically on the consumer credit industry.

The $700 billion emergency rescue plan was first developed as a way of keeping the markets liquid by providing emergency funds to prevent the credit market from further shutting down. The money was going to be aimed at financial institutions through buying up toxic assets with the hope that this additional capital would provide them with the sense of security needed to start the business of lending again. Unfortunately, that hasn’t quite caught on with the speed that is needed. Around 50 financial institutions have been granted approval (or have been pre-approved) to receive $172 billion in capital resources.

To help speed things up, the US Treasury’s $700 billion rescue plan is tilting the tables toward consumer’s debt. Paulson positioned the need to officially broaden the initial scope of the project to help aid those non-banking institutions that deal directly with consumer credit issues. Credit card companies, student loan providers and auto loans can soon be the beneficiaries of the second stage of this unprecedented Government assistance plan, as investors are no longer partial to these types of loans.

Paulson stated that, “although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions.”

His thoughts are that systems dealing with consumer loans need assistance as “Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”

The hope of this entire strategy is by stabilizing the big lenders, the financial system will no longer be clogged. Ultimately, the country and all its residents will benefit from a trickle-down effect and the reactivation of credit liquidity.

“Mortgage meltdown” not affecting the availability of mortgages today.

You hear the term “mortgage meltdown” almost every day and assume it will be tough to get a mortgage. In reality, mortgage loans are abundant with most mortgage products relatively unaffected by the recent troubles in the subprime segment. According to Tim Burke, CEO of Nationwide Lending Corporation, “mortgage money is plentiful, just the products and underwriting that allowed people to buy homes they couldn’t afford have disappeared.”

Burke goes on to say “interest rates for a 30 year fixed-rate mortgage remain close to 6% for borrowers with reasonably good credit; it doesn’t need to be perfect. Internet lending has allowed Nationwide to offer wholesale rates and fees and not compromise service”. Other than subprime, 100% loan-to-value and stated-income, there is mortgage money available to anyone with the capacity to repay the loan and ability to document their income.

More affordable home prices, combined with historically-low interest rates and a large surplus of houses, presents a great opportunity to buy. The current housing market is particularly advantageous for first-time home buyers who can benefit from a temporary $7,500 tax credit that Congress put in place and that will expire after June 30, 2009.

Qualifying for a jumbo conforming loan will get more difficult in the New Year.

Congress authorized, as part of the Economic Stimulus Act of 2008, a temporary increase to the conforming loan limits in high cost regions – defined by median home sale price. High priced areas such as Los Angeles, a mortgage as high as $729,750 is considered conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac.

Beginning in 2009, loan limits changes. Effective January 1st 2009, conforming mortgages will be capped at $625,500 in high cost areas, and $417,000 everywhere else. If you are in a high cost area, timing may be important to you. You may want to consider taking advantage of a cheaper conforming loan this year if you need to borrow between $625,500 and $729,750, or risk paying the jumbo loan premium.

Interest free tax credit is available to first time home buyers. What a great opportunity to help take advantage of falling home prices.

The Housing and Economic Recovery Act of 2008 contained a provision for a tax credit of up to $7500 for first time home buyers. What makes this more interesting is a first time home buyer is defined as “a buyer who has not owned a principal residence during the three-year period prior to the purchase”. The credit is available for homes purchased on or after April 9, 2008 and before July 1, 2009, with the definition of purchase being the closing date.

There are income requirements, with single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualifying for the full tax credit. You may qualify for a partial tax credit if you are over these adjusted gross income limits.

Getting started with the tax credit program is simple; you claim the tax credit on your federal income tax return. The tax credit works like an interest-free loan and must be repaid over a 15-year period or when you sell the home, if there was a sufficient profit. The repayments do not begin until two years after the credit was claimed.

Remember, its interest free!