Mortgage lenders and servicers in the making Home Affordable program will be required to offer substantive help to those who have lost jobs. Under new guidelines, they will have to take steps to reduce mortgage payments to no more than 31% of the unemployed borrower's income--which will likely be the borrower's monthly unemployment insurance benefit--for as much as six months. For the most desperate, lenders may be able to forbear the payment entirely.
Loan Modifications to Prevent Foreclosure
The new initiative takes on what most experts consider the major cause of the latest wave of foreclosures: the 10% unemployment rate. While the subprime mortgage crisis that began three years ago was the creation of millions of loans that should never have been made, today's defaults and foreclosures stem primarily from the country's economic downturn and the fact that, however willing and creditworthy, borrowers with no income can't be expected to make their mortgage payments indefinitely.
Underwater Borrowers to Benefit
In addition, the Obama administration seeks to encourage mortgage lenders to help distressed borrowers who owe more on their mortgages than their properties are worth. First American CoreLogic, a California-based real estate research firm, estimates that the typical homeowner who is underwater won't see a rise in home value above the loan amount at least until late 2015. And currently, one-fourth of all American homeowners are underwater on their home loans. However, principal reduction isn't a freebie. HAMP administration guidelines allow lenders to reduce the loan amount but create an interest-free balloon note that must be repaid when the property is sold.
Possible solutions include reducing the loan balances of millions of underwater homeowners and possibly refinancing their loans into FHA mortgages to get them the best mortgage rates available. For the first time, the government will offer financial incentives to mortgage lenders that cut the principal owed by prime-grade homeowners on qualified mortgages.
Finally, government payments to lenders that modify the terms of second mortgage will double under the plan. Approximately half of struggling homeowners have second mortgages. These loans are an added burden, especially when homeowners' total debt, as a result, is greater than their home values.
The changes are expected to take effect over several months in 2010 and will be funded out what's left of the $700 billion bailout program for the financial sector. No new taxpayer funds will be used for this initiative.