Managing Debt

Will The President’s New Debt Relief Programs Help You?

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President Barack Obama has announced two plans to offer relief for borrowers overwhelmed with debt. The first, an expansion of the Home Affordable Refinance Plan (HARP), will allow more homeowners with negative equity in their homes (in other words, are “underwater”) refinance their loans into lower fixed rate mortgages. The second, the “Pay As You Earn” program, will expand the relief offered under the Income Based Repayment Program (IBR) by allowing certain student loan borrowers to make smaller monthly payments, based on income, and to have the balances of their loans forgiven after ten or twenty years.

The President says the new changes in the student loan IBR program will reduce monthly payments for 1.6 million borrowers. Borrowers with eligible federal loans will be able to make payments totaling just 10% of their monthly incomes, and have balances forgiven after ten years of public service work or twenty years for other types of employment. Those with very low incomes, or those who are unemployed, may be able to make no payments. The CFPB has also launched a new set of tools to help student loan borrowers better understand and manage their student loans.

[Related article: More Help for Underwater Homeowners]

Changes to the Home Affordable Refinance Program are aimed at helping some of the 11 million homeowners who owe mortgages greater than the values of their homes. The new rules are designed to allow anyone with a mortgage backed by Fannie Mae or Freddie Mac—no matter what they owe—refinance if they are current on their payments, and don’t have recent late payments.

Joe Kelly, principal of ArcLoan.com which has helped many borrowers refinance under the current HARP program, cautions that the final details aren’t out yet, and until they are, “we won’t know exactly who can be helped.” He says that one of the biggest barriers with HARP is getting lenders to participate, and points out that the revised guidelines are supposed to offer some protection for lenders that may help relieve some of that problem.

These programs won’t help everyone, though. The two major groups of borrowers who won’t get relief under these programs are those who:

Have private student loans, or mortgages not owned by Freddie Mac or Fannie Mae. A reader recently wrote on the Credit.com blog:

Why is it always the government loans fannie/freddie that are being bailed out. Is there something in the works for non-government funded loans? I’m in a home currently appraised at 160,000 but I owe 250,000 on a conventional ARM currently at 7.6%. I can’t seem to find anyone willing to refinance and the current lender no longer does refinancing. Positive payment history associated with this loan. Any ideas?

Lynn O’Shaughnessy, a college funding expert, says “The president’s decision to open up the federal income-based repayment plan to more student loan borrowers should be a huge help. The move will make federal student loans even more desirable. Unfortunately, too many students turn to less desirable private loans before they max out their federal options.”

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Have fallen behind on their student loans or mortgages. Though mortgage delinquencies have been dropping, with 3.9% of mortgages 90 days or more behind, some two million homes are still in some stage of foreclosure, according to Lawrence Yun, chief economist of the National Association of Realtors. Even under the new HARP guidelines, borrowers will not be eligible to refinance unless they are current on their payments, have no late payments in the last six months, and have not made more than one late payment in the past year.

For student loans, IBRinfo.org states that borrowers cannot be in default if they want to take advantage of IBR. According to their website, “If you are able to get out of default, you will then be able to choose IBR or another repayment plan.” The Project on Student Debt has noted an uptick in student loan defaults in recent years. They say the “official “two-year cohort default rates” show that 8.8 percent of student loan borrowers who entered repayment in 2009 had defaulted by the end of 2010, up from 7 percent for those entering repayment in 2008.”

With most loans, borrowers who can’t keep up and can’t work out alternative payment arrangements with their lenders often end up resolving their debts in bankruptcy. But student loan debts are extremely difficult to discharge in bankruptcy, and it is also very difficult to get a principal reduction on a mortgage for a primary residence in bankruptcy. And until that changes, relief for those who most need it may be a long time coming.

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Image: Wikimedia Commons

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  • Debbie

    My loan was originated in June 2008, never had to pay a late payment until last month. My late charge went on the 16th of the month and I paid my payment plus the late charge on the 25th of Oct. Increasing medical bills and co-pays have put me in a bind, but my goal is to keep my mortgage up to date and not incur any more late fees. Question…by me going past the date of the 16th one time on my mortage going to keep me from refinancing my mortgage under Obamas New Plan? Please Help!

    • Gerri Detweiler

      Debbie,

      You may be OK but try to keep current until you find out if you qualify. The most important hurdle is that you must have a loan owned by Freddie or Fannie. You can check that out online at YouCanRefi.com. The other questions can’t be answered in full until the program details are announced on November 15th. If your loan is not held by Fannie or Freddie, then you definitely won’t qualify and you should look at other options which I outlined in my series Underwater on Your Home: http://blog.credit.com/2011/07/underwater-on-your-home-your-six-options/

  • Debbie

    Would the MI Mortgage Insurance rate change? Can I keep my current MI rate? Would not do much good if this rate increased because needing a reduction on my mothly payment along with an interest rate reduction, (currently paying 6%). When will this program go into effect so I can refinace? Help.

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  • FRED BURNS

    I HAVE SEVERAL JUDGEMENTS AGAINST ME BECAUCE OF CREDIT CARD DEBT. IS THERE ANYTHING I CAN DO?

    • http://www.Credit.com Gerri

      Fred,

      You can either pay off the judgments, try to negotiate settlements on them (to pay less than the full balance) or talk with a bankruptcy attorney to see if you can wipe them out in bankruptcy. You want to do something to try to resolve them because judgments can be renewed for a long time, and you don’t want to run the risk of having bank accounts seized or wages garnished, for example. (A bankruptcy attorney can tell you what the collector can and cannot do to you to collect those judgments.)

      • Sarah

        I agree

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  • Woody

    11-30-2011

    The number one thing that will get our economy moving again is to get consumers out of debt. The high interest rates and fees (particularly credit cards, student loans) and the corrupt collection methods not only kill the economy but put people in early graves. We can and should do more! The President is providing good leadership on this issue, but more needs to be done.

    Debt is both an issue for those who make it (nation and consumers) and for those who create environments where it is encouraged (banks and finance companies). It is the sin and the one who encourages sin. Both are in bondage and need to be set free!

    There is a Light that can lead us out of sin and debt. “They shall call His name Jesus”!

    Thank you Lord!

    • Sarah

      How many more times are we supposed to be ‘forgiven’ for overspending. If we were not $16 trillion in debt already, we should have this conversation – but we are. is anyone thinking long term for the future of America – of just short term???

      If they forgive the debt you have in a home in which you are current, not only will the value of your home go down, the vaue of all the homes in the area will decrease. It will take many more years for your home value to recover because when you agreed to have your loan forgiven, you agreed that your home was worth whatever amount the government told you it was worth. I don’t think any of us want that type of control over our assets. you can receive 1099 c . Many people who are current like I am are up in arms because the value if their homes decreased with all of the foreclosures – just wait if this happens. If the government sets this precendent good luck finding future homeowners who see in value in buying a home and then your value will realy fall…..a home is one of the few assets we have that you don’t haev to pay capital gains when you sell… we shouldn’t give the government the power to control that.

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  • Sarah

    if they forgive the debt you have in a home in which you are current ,not only will the value of your home go down, the vaue of all the homes in the area will decrease. It will take many more years for your home value to recover because when you agreed to have your loan forgiven, you agreed that your home was worth whatever amount the government told you it was worth. I don’t think any of us want that type of control over our assets. you can receive 1099 c . Many people who are current like I am are up in arms because the value if their homes decreased with all of the foreclosures – just wait if this happens. If the government sets this precendent good luck finding future homeowners who see in value in buying a home and then your value will realy fall…..a home is one of the few assets we have that you don’t haev to pay capital gains when you sell… we shouldn’t give the government the power to control that.

  • Larry Copeland

    My mortgage is with Wells Fargo Financial (adjustable ARM). I am a 100% disabled vet who was a victim of predatory lending by a local Wells Fargo Financial agent and now underwater on my mortgage. I have never been late on any of my financial obligations and Transunion score of 720. Do I have to have a FHA, VA, Fannie Mae or Freddie Mac mortgage to qualify for HARP? If so, are there any refi programs for individuals like myself. Thanks, Larry

    • Gerri Detweiler

      Larry,

      The first thing you want to do is find out if your loan is owned by Fannie or Freddie. That is a requirement of HARP. Call Fannie Mae at 1-800-7FANNIE and Freddie Mac at 1-800-FREDDIE.

      If you don’t qualify under HARP to refinance, I’d recommend you read my series about options if you are underwater on your home. Hope you find something helpful in there.

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