A common criticism of programs such as HAMP is that they do nothing to help homeowners have made sacrifices to stay current on their home mortgage but who are unable to refinance to take advantage of lower interest rates because their home has decreased in value and is now worth less than they owe.
Suppose you have a mortgage at 6 or 7% interest and are fortunate enough to be employed, but your spouse has lost his or her job, or your hours have been cut back. If you could refinance at current rates (say, 4%), the reduction in monthly payments might might make the difference between keeping and losing your home. Also, if you have been paying on the loan for several years and could spread repayment of the current balance over the next 30 years, that would give you even more breathing room. The problem is that you owe more than the house is now worth.
The policy change recently proposed by President Obama hold some promise of providing relief for folks in such a situation. The details have not yet been released, but thePresident’s proposal is to remove caps that had allowed homeowners to refinance 100% of the outstanding balance on loans owned or guaranteed by Fannie Mae and Freddie Mac, where the balance owed is up to 25% more than the house is worth.
The proposal might enable some homeowners to avoid bankruptcy altogether. For others, it might make a Chapter 13 plan more feasible.