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Feds to Back Loans if Lenders Cut Balances - 2010-04-04
FEDS TO BACK LOANS IF LENDERS CUT BALANCES

In its ongoing effort to battle rising foreclosures, the Obama administration recently announced a new initiative aimed at helping troubled borrowers remain in their homes. The plan has two prongs, one focusing on the unemployed and the other aimed at so-called "underwater" homeowners.

The new programs are a tacit acknowledgment that current efforts have fallen far short of the previously announced goal of assisting "three to four million" homeowners. In fact, less than 170,000 borrowers have been able to obtain permanent loan modifications under the Home Affordable Modification Program (HAMP).

Borrowers who are out of work can now apply to their lender for the right to reduce monthly payments for three to six months, or in some cases, skip them altogether. Federal incentives to lenders who go along will be increased from previous levels. The idea here is to provide a temporary respite while the borrower gets back on their feet.

But the big news is in the second part of the plan.

For the first time ever, lenders will be encouraged to slash loan balances to a level in line with current home values. In exchange, the new loan will be insured against future default by the FHA.

So even though a lender may give up a substantial amount in the principal balance of the loan, they obtain a federal guarantee of payment, a very valuable commodity. In states like Nevada, Arizona, California and Florida, lenders may find they are actually better off avoiding the foreclosure.

In addition, participating lenders will receive larger cash incentives than in previous modification plans.

The target of this principal reduction plan is a homeowner who either refinanced or purchased their home at time when home values were much higher. As the recession wore on, home values have dropped, causing many owners to owe more than their homes are currently worth. This fact prevented even credit-worthy owners from obtaining new financing with better terms.

The existing lender must lower the first mortgage balance to no more than 96.5 percent of the current appraised value, and then the borrower must be able to qualify for a replacement loan insured by FHA. In addition, only owner-occupants are eligible and owners who are behind on payments need not apply.

In this new initiative, the administration hopes to balance the interests of activists and lawmakers against those of lenders and loan servicers. But policy makers have apparently come to the painful conclusion that the time for balance cutting has arrived.

Whether or not the incentives and FHA insurance will be enough to encourage lenders to participate remains to be seen. In any case, don't call your lender about this yet. The Treasury Department stated in their news release that they hope to be able to roll out parts of this program by the fall.





                   
 
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