Finance Globe

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Loan Modification Program Details Announced

The U.S. Treasury Department today unveiled the details of the "Making Home Affordable" loan modification program.

"Only two weeks after the President unveiled his plan to help promote homeowner affordability, we are moving forward today with these guidelines to implement that plan," HUD Secretary Shaun Donovan said. "This step forward represents a tremendous coordinated effort between major government and regulatory agencies to help bring relief to America's housing market and homeowners. This plan will help make home ownership more affordable for nine million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans."

Loan Modification Program
President Obama talked briefly about this program on February 18 when he outlined the $75 billion Homeowner Affordability and Stability Plan in Mesa, Arizona. This part of the plan is aimed at encouraging mortgage lenders to work with at-risk borrowers who've either already missed payments or who haven't yet missed payments but are struggling to keep up.

Participating lenders and mortgage servicers will first be required to reduce the borrower's monthly payment to no more than 38% front-end debt-to-income ratio. The Treasury will then match dollar-for-dollar to bring the front-end debt-to-income down to 31%. (Front-end debt is debt related to housing, and doesn't include other types of loans or credit.)

Homeowners may qualify for the program if they received their mortgage before January 1, 2009, are having trouble with the mortgage payment but do not have to be already delinquent, the property is their primary residence, and the current mortgage is a conforming loan of no more than $729,750. Two to four-unit properties can qualify as long as the borrower resides in one of the units, and a higher loan limit is allowed for these types of properties.

The loan mod program not only helps homeowners attain an affordable monthly payment, but "pays for success" in keeping up with payments under the modified terms. Borrowers can receive a $1,000 payment that goes straight to reducing principal every year for five years as long as they continue to make on-time payments.

Participation is at the lender or mortgage servicer's discretion. But they are encouraged with incentives to help homeowners - so the government expects wide participation. There are incentives for working with at-risk homeowners before they become delinquent on their payments and they also receive a "pay for success" incentive for successfully helping borrowers keep their homes.

The Treasury said that the program will also include additional incentives to lenders "for efforts made to extinguish second liens on loans modified under this program. Extinguishing second liens will make mortgages more affordable, improve loan performance, and help prevent foreclosures."

Loan modifications can begin now, but borrowers interested in participating are asked to be patient since lenders and mortgage servicers are likely to be overwhelmed with calls at this time. The program is open until December 31, 2012. A loan can only be modified once under the program.

In a normal real estate market, homeowners sell their home when they realize they can't afford their mortgage payments due to job loss, unexpected medical bills, or other source of financial stress. But the severe housing downturn, coupled with record national job loss makes selling difficult, and even more difficult to sell without taking a loss - unless they've had a chance to build up years of equity.

Millions of homeowners are simply stuck - unable to sell and they can't afford their current house payments. The loan modification program is aimed at helping these homeowners who are stuck - the program is expected to reach three to four million homeowners.

But the plan will not help everyone. For example, it is not designed to reduce mortgage balances for borrowers who have enough income to make their mortgage payments but owe more than their homes are worth. It also will not help investor borrowers or borrowers who have no income and cannot make any mortgage payment.

Refinance Program
The Making Home Affordable refinance program is a separate measure aimed at helping responsible homeowners with Freddie Mac or Fannie Mae mortgages refinance at today's low rates by allowing loan-to-value ratios of up to 105%. The decline in real estates values has become a common barrier to refinancing because an 80% loan-to-value ratio is typically the maximum allowed.

The refinancing program is aimed at helping four to five million homeowners who have a solid payment history, but cannot otherwise refinance simply due to the decline in their home's value. The Treasury said that documentation requirements are not likely to be burdensome since the GSE lenders and servicers already have much of the borrowers information on file, and that in some cases an appraisal may not even be necessary. The refinance program ends June 2010.

Other measures in the Homeowner Affordability and Stability Plan: the Treasury will do their part to ensure liquidity in the mortgage market by continuing to purchase Fannie or Freddie-backed mortgages, continuing to support the practice of allowing bankruptcy courts to modify mortgage loan principals to the fair market value of the home, and rewarding grants to communities that take initiative in preventing foreclosures locally.

"Two weeks ago, the President laid out a clear path forward to helping up to nine million families restructure or refinance their mortgages to a payment that is affordable now and into the future. Today, we are providing servicers with the details they need to begin helping eligible borrowers," said Treasury Secretary Tim Geithner. "It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive. Economic recovery requires action on all three fronts."

In conjunction with the release of the new guidelines, Treasury, HUD and other members of a broad interagency task force have prepared consumer friendly Q&A and eligibility assessment tools for borrowers available at

To ensure the program can be implemented as quickly as possible, the agencies also have conducted extensive outreach with housing counselors and mortgage servicers, including the development of call center phone scripts, a training plan and detailed guides, to prepare them for incoming inquiries from borrowers in the wake of the guidelines release.

An expanded online resource will soon be available for borrowers, and agency representatives will fan out across the country in the coming weeks to conduct outreach at home ownership events in communities hardest hit by the housing crisis.

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Wednesday, 08 February 2023

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