The $75 billion foreclosure prevention plan calls for loan servicers to refinance eligible mortgages, but loan servicers are not prepared to deal with the anticipated explosion of modification and refinance related applications.

The government-created website, www.makinghomeaffordable.gov, filters out eligible borrowers by determining whether they might qualify for a loan modification or refinance. The federal government anticipates the foreclosure prevention plan will rescue up to nine million struggling homeowners.

first tuesday take: This plan is of little help to California and will not benefit the exaggerated nine million rescue-eligible homeowners who want to keep their homes by refinancing to a 30-year fixed interest rate. “Eligibility” is the misnomer in the calculus for qualifying for a refinance, federal-style.

A homeowner is not eligible for a refinance if he has a negative equity in his property. Thus, most Californians are excluded from the feast. A couple of other eligibility requirements eliminate many Californians, including:

  • the homeowner has not been delinquent on their loan beyond 30 days; and
  • the loan is owned or guaranteed by Fannie Mae or Freddie Mac.

Most of the California subprime loans went directly to Wall Street bankers and investors – without first being sold to Fannie or Freddie or getting their blessing by way of a guarantee.

As anyone dealing with negative equities knows, the best relief for a homeowner who does not want to retain their home is to sell it – a process called a short sale. However, to get the lender to consider a short sale, the homeowner generally has to stop making payments and show hardship to get the discount needed to close the sale at a price below the mortgage balance.

A homeowner with a negative equity who wishes to keep his home and get the loan reduced (by a cramdown of the principal balance) must first default in order to negotiate with the lender. The lender will only agree to refinance if they can make money on the arrangement, which they cannot do until the homeowner defaults and they can charge the real lender holding the loan a fee for negotiating the discount by modifying the note.

These factors negate much of the benefit of the federal government’s rescue plan and provide no help to Californian homeowners who have no equity – the ones in trouble and in need.

Re: “Obama housing fix: Banks not ready” from CNNMoney.com