New Loan Modification Programs Intended To Reduce Foreclosure Rate
With the mortgage crisis continuing unimpeded, the US government has decided to feed billions into the dying system in order to help shore up plummeting property values. In 2008, 53% of loan modification programs failed within the first 6 months of restructuring. However, in order to ensure this does not happen again, the US government has created a plan that outlines seven things every homeowner should know.
A catalyst of the new plan was the belief that if struggling borrowers could make their monthly payments they could stay in their homes. This is based on the fact that foreclosures rarely occur because homes are no longer worth what was paid for them. Instead, monthly payments are too high to fall into the constraints of tighter budgets.
As a result, the new plan requires loan service providers to ensure that monthly payments are no larger than 38% of an individual’s gross monthly income. Beyond that the government would pay up to 31% of the gross monthly income toward the remainder of the payment. Although the principal would remain the same, this would be accomplished by lowering interest rates to as low as 2% and extend loans up to 40 years if needed.
To ensure participation, service providers would receive a monetary incentive for each loan modified that would be paid as long as borrowers continued to make payments on time. Incentives for borrowers are also built into the new plan as well. In this case, principals would be reduced each year for up to five years as long as obligations were met. This incentive plan would begin after the first three regular monthly payments.
It was pointed out that this plan is designed for homeowners caught in the housing crunch rather than for speculators. This means that qualified housing must be owner-occupied, within a set price, and be owned by individuals experiencing extreme hardship. It is important to remember that these payments would continue only for a five year period while the economy recovers. This type of modification is available now.
The objective of the plan is to ensure that modified loans produce an increase in cash flow for the mortgage holder, which is designed to ensure broad participation. This would also ensure that it is also in the best interest of borrowers. For those who have lost jobs recently, this plan could serve as a boon to get them over the hard times.
The plan also includes incentives for paying off second liens and home equity lines of credit. This is one part, however, which remains unclear. The reason it is so problematic is that second lien holders must also need to have reasons to participate.
One of the problems with the plan is that, although it helps homeowners retain their property, it does little to help speculators. Since they are not included, it is feared that this group may fall into the cycle of mortgage defaults that could equal or surpass the foreclosures of owner-occupied residences seen today. For those interested in finding out more about the new loan modification programs, contacting a loan service provider should help answer any questions.