The Homeowner Stability Initiative

How it Works

The Homeowner Stability Initiative was enacted to assist homeowners who cannot afford their current monthly mortgage payments. The initiative joins the efforts of all affected parties — borrower and lender, servicers and the government — to help as many as three million responsible but strained homeowners to pay their loan amounts at reduced rates.

The essential components of the program are:

1. A shared responsibility by financial bodies and the Treasury Department [?] to reduce monthly payments.

First, the lender must lower the interest rates on the mortgage to a level of affordability, so that the borrower is spending no more than 38% of his or her income on monthly payments.

Next, the borrower’s debt-to-income ratio can be lowered down to 31% via matching dollar-for-dollar funds towards interest rate reductions.

The modified payment plan will stay in effect for five years to ensure long-term repayment success. After this, the interest rates may be gradually increased to their original level prior to the loan modification.

Lenders also have the option of reducing the amount of mortgage principal to promote affordability. If they do so, the initiative will partially contribute to the cost of lowering the principal.

2. “Pay for Success” measures

Loan servicers get a fee of $1,000 up front for each modification that fulfills the guidelines of this program/initiative. They will further receive monthly fees (up to $1,000) for each month the borrower remains current with loan payments. These fees, allowable for up to three years, are called “Pay for Success” incentives.

3. The mortgage holder and servicer will receive payments of $1,500 and $500, respectively, for each loan that is modified before the borrower misses a loan payment. This incentive takes advantage of the fact that modifications succeed more often when the borrower is still current.

4. To encourage borrowers to make regular payments on time, a monthly balance reduction payment, designated for lowering the mortgage’s principal balance, is also provided. The borrower can get as much as $1,000 annually for five years as long as mortgage payments remain current.

5. A “partial guarantee” initiative is designed to discourage lenders, fearing more drops in home prices, from foreclosing on viable mortgages. This takes the form of an insurance fund of up to $10 billion, which will provide a safety net against falling prices for lenders who may be reluctant to perform more loan modifications.

For each loan, the initiative can provide an insurance payment based on any decline in the home price index, encouraging more refinancing and helping more families to keep their homes.