Last week President Obama annonced his plan to address the foreclosure crisis.  http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf  The plan is a step in the right direction but this may not help Californian's who have jumbo loans [typically first loan balances over $729, 750.00].  Three parts of the plan are described below.  The best option of the three aspects of the plan for Californians is "judicial loan modification" in bankruptcy.  However, this proposed change in the BK law faces a tough battle in Congress.  The other parts of the plan remain voluntary as to the lenders and do not mandate principal reductions.

Part One:  After standardizing the rules for loan modification for all lenders, see http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf, the Government will pay loan servicers a $1,000.00 per year for up to 3 years, if they voluntarily reduce interest rates down as low as 2% so as to reduce monthly payments to 38% of a borrower's gross income.   The servicer gets a dollar for dollar additonal bonus if they drop the payment down to 31% of gross income.  Borrowers receive $1,000.00 per year off the principal balance for up to 5 years.  The interest rate is fixed for 5 years and then increases to the market rate over time.  Unfortunately, this plan is voluntary and does not apply to Jumbo loans and will not help most Californians.  There is no reduction in loan principal.

PART Two:   The plan also includes an endorsement of the idea that Congress might change the bankruptcy code to let judges write-down mortgage debt - a not-to-subtle reminder that if the mortgage industry doesn't play ball with voluntary modifications, a more imposing solution could be around the corner.  This is the only part of the Plan that would really help Californians.  The loan servicers would no longer have to worry about getting sued by the true owners of the loans.  The judge could reduce principal and interest rate and extend the terms of loans up to 40 years.  The downside for borrowers is that they must stay in Bankruptcy for 3 to 5 years.  This may give lawyers some negotiating leverage to get principle loan balances in line with lower home values.

Part Three:  FANNIE\FREDDIE REFI PROGRAM.  the plan also seeks to help borrowers who have been making mortgage payments on time but can't refinance into cheaper loans because they've seen equity in their homes evaporate as prices have plummeted.  The federal housing agencies Fannie Mae and Freddie Mac will now refinance loans they hold or guarantee, even if borrowers owe more than their house is worth - up to 105% of the value of the property. See http://www.financialstability.gov./makinghomeaffordable/refinance_eligibility.html to see if you have a Fannie or Freddie loan.  Good credit and payment history is required.  There is no reduction in loan principal.  The Administration figures that offer could reduce monthly payments for four to five million borrowers but this plan ignores the reality that the delinquency rate among jumbo loans is spiking and a foreclosed property hurts the value of surrounding ones, no matter the size of the house.   Second mortgagors in excess of the jumbo limit must be willing to subordinate to the new FHA loan in some cases.