There has been a lot of grumbling (particularly on CNBC this morning when Rick Santelli took a poll in the pit as to who would want to pay for someone’s housing mistakes) about people getting helped who don’t deserve it.

Yesterday, the White House released these three examples of who might be able to be helped by the Homeowner Affordability and Stability Plan.

Family A: Access to Refinancing

In 2006: Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put down just over 20%.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

Today: Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000. Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing. Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.

Existing Mortgage Refinancing
Balance $199,584 $203,575
Remaining Years 27 30
Interest Rate 6.50% 5.16%
Monthly Payment $1,308 $1,113
Savings $196 per month $2,347 per year

Family B: Access to Refinancing

In 2006: Family B took a 30-year fixed rate mortgage of $350,000 on a house worth $475,000 at the time. (The family put down just over 26%.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

Today: Family B has about $337,460 remaining on their mortgage but their home value has fallen to $400,000. Their “loan-to-value” ratio is now 84%, making them ineligible for a Fannie Mae refinancing. Under the Refinancing Plan: Family B can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $4,000.

Existing Mortgage ,Refinancing
Balance $337,460, $344,210
Remaining Years 27, 30
Interest Rate 6.50%, 5.16%
Monthly Payment $2,212, $1,882
Savings $331 per month, $3,968 per year

Family C: Eligible for Homeowner Stability Initiative

In 2006: Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker – Mom & Pop Mortgage – sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.

Today: Family C has $214,016 remaining on their mortgage but their home value has fallen 18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income. Their loan is now 113% the value of their home, making them”underwater” and unable to sell their house. Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.

Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.

Existing Mortgage, Loan Modification
Balance $213,431, $213,431
Remaining Years 27, 27
Interest Rate 7.50%, 4.42%
Monthly Payment $1,538, $1,132
Savings: $406 per month, $4,870 per year

Homeowner Stability Initiative: How the Program Works for the Lender, Government and Borrower

First, Investment Bank (working through a mortgage servicer) reduces the interest rate so that the Family C’s monthly debt-to-income ratio drops from 42% to 38%. This means that Investment Bank must reduce the interest rate from 7.50% to 6.38%, bringing down Family C’s monthly payment from $1,538 to $1,387.

Second, the government and Investment Bank share the cost of further reducing the interest rate so that the Family C’s monthly debt-to-income level is lowered to 31%. Any dollar the bank spends is matched by the government. At this stage, Family C’s interest rate is reduced from 6.41% to 4.43%. In total, Family C’s monthly payment has fallen from $1,538 to $1,132.

If Family C remains current on their payments, they will receive incentive payments up to $1,000 a year, or $5,000 over five years, that would go towards reducing the principal they owe. Additionally, the mortgage servicer can earn an up-front incentive fee of $1,000, plus up to $1,000 per year in “Pay for Success” fees for three years, so long as Family C remains current.

February 19, 2009