Congress passed the "Homeowner Affordability and Stability Plan." Now what?

According to information released by the White House, the plan is designed to help borrowers who have stayed current on their mortgage payments but whose homes have decreased in value. They can refinance to get a "fixed affordable payment," provided the new mortgage will not exceed 105 percent of the current value of the property and the existing loans are held or securitized by Fannie Mae or Freddie Mac.

There are a number of problems with this plan, the first one being determining if Fannie Mae or Freddie Mac can find your mortgage. The second is determining the value of the property in relation to the 105 percent mortgage limitation. The White House blithely dismisses this with the statement that "the current value of your property will be determined after you apply to refinance."

Ordinarily, a bank will require an appraisal to estimate the value of the property. The appraiser does not "determine" the value of the property but only "estimates" it, using sales of comparable houses that have occurred within the previous six months. Arriving at an exact value is not realistic, and the best an appraiser can do is come up with an educated guess.

Under this plan, appraisers will be under tremendous pressure by the banks and the borrowers to arrive at a value that is compatible with the 105 percent limitation. The possibilities for fraud are evident.

Presuming that these limitations are met, the home owner can get a loan at a lower interest rate, and the bank will be compensated by the government for the difference between the old interest rate and the new one, probably using discounted cash flow analysis.

Who will pay for compensating the bank? You will.

Earle D. Hightower

Pinehurst