Money and Main Street

Your home: Washington's solution

U.S. has invested billions to help at-risk borrowers stay in their homes. Some say bailing out irresponsible homeowners presents a risk.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The road to a housing recovery will be a difficult one.

Nearly 1.2 million homes have been lost to foreclosure since August 2007, and 11% of all mortgages are in trouble.

Some estimates say up to 12 million homeowners may be underwater, with 4 million behind on their payments. Both home sales and prices have plummeted.

Lawmakers and economists have pointed to unscrupulous lending and irresponsible borrowing for bringing down the housing market. Experts say an economic recovery will need to start with housing.

Here's a look at what the government is doing and who is being helped.

What's being done

The Obama administration unveiled its $75 billion Homeowner Affordability and Stability Plan earlier this month. There are two separate parts to the plan: a refinancing initiative and a loan modification plan.

The refinancing plan will allow some homeowners to convert their mortgages into lower-cost, 30-year or 15-year fixed-rate loans, by making mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) refinance those home loans that they back.

The modification plan calls for servicers to voluntarily reduce borrowers' interest rates, after which the government would kick in additional money to bring borrowers' payments down.

In an effort to lure new buyers, $6.6 billion of the economic stimulus plan enacted in February will go toward refundable tax credits of $8,000 - or 10% of the home's value - for first-time buyers. Previously, first-time buyers could claim a $7,500 credit, but it had to be paid back.

Who's being helped

The refinancing plan aims to help 5 million homeowners who have loans backed by Fannie Mae and Freddie Mac. In order to qualify, borrowers must owe between 80% to 105% of the value of their home. They must also be current on their payments, meaning they haven't been more than 30 days late on mortgage payments in the last 12 months.

The modification plan aims to help 4 million borrowers who are behind in their payments or are at risk of default. That includes those who are those suffering serious hardships, declines in income or increases in expenses; facing an interest rate hike; having high mortgage debt compared to income; owing more than their house is worth, or demonstrating other reasons for being close to default.

For those who qualify, the government would reduce payments to 31% of the homeowner's income, as long as it doesn't reduce the mortgage rate below 2%. After five years, the rate will increase by 1 percentage point a year until it reaches either the original rate or the what the prevailing mortgage rate was at the time the loan was modified. Whichever is lower will apply.

If rate reductions aren't enough, a lender can extend the term up to 40 years, or shift part of the principal to the end of the loan at no interest. Servicers also have the option of reducing the loan's balance.

Borrowers must owe no more than $729,750, excluding interest or other additional costs. The loan must have been originated before Jan. 1, 2009, and total monthly mortgage payments must be more than 31% of pre-tax household monthly income.

To qualify for the $8,000 tax credit, the purchase must be made between Jan. 1, 2009, and Nov. 30, 2009, and buyers must make less than $75,000 a year (or $150,000 per couple). The credit begins to phase out for people with income levels of up to $95,000 a year (or $190,000 for couples). Buyers may not have owned a home for the past three years to qualify as "first time" buyers. They must also live in the house for at least three years, or they will be obligated to pay back the credit.

What are the risks

Administration officials stress that they are not using taxpayer money to bail out irresponsible homebuyers, but the eligibility requirements do not preclude borrowers who knowingly bought homes they could not afford from benefiting from the government programs.

"Some borrowers presumably knew what they were getting into," Federal Reserve Chairman Ben Bernanke told Congress. "Part of the issue was mortgages that should not have been made and lenders did not take sufficient responsibility. [But] in many of these situations we have to trade off the moral hazard issue against the greater good."

Some observers also say the $75 billion plan may not go far enough: It does virtually nothing for the unemployed, who often don't have enough income to make any reasonable monthly payment affordable. And, since it relies more heavily on lowering interest rates than on reducing principal, it does little for borrowers concerned their homes will never recoup their value. To top of page

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