The new Obama administration has taken drastic measures to help struggling homeowners modify existing loans that may be in or going into default. Those suffering hardships, experiencing declines in household incomes or rising expenses, rising interest rates, high mortgage debt to income ratios, owing more to the lender than the home is worth or going through other reasons for default are now able to seek modification plans under the current administration’s aggressive aid programs. The specifics of the workout are as follows:
To participate in the loan modification plan, borrowers must:
- have obtained their mortgage before Jan. 1, 2009;
- have a primary mortgage of less than $729,500;
- live in the property;
- fully document their income by providing tax returns and pay stubs;
- sign a statement of financial hardship; and
- go for counseling if their total household debt – including auto loans, credit cards and alimony – totals more than 55% of their income.
The modification program is scheduled through 2012 but homeowners facing or already in default on existing loans can only seek relief once in that time frame. Interest rates are at historically low levels and those borrowers that have a favorable debt-to-income ratio have the best chance of restructuring their loan/s. While banks are still having a tough time refinancing properties with little or no household income, the current modification program can at least help in buying time to work out the loans between borrowers and lenders.
Many of the issues facing homeowners today were caused by creative and often times loose lending practices that encouraged adjustable rate mortgages to borrowers that seemed favorable in the short term but have proved to be disastrous once the rate adjusts. By reducing or freezing rates on these loans, the government is doing its part to provide an alternative to default or foreclosure. Lenders are also now capable of extending loan terms in some cases, to as many as 40 year terms, or shift part of the principal to the back end of the loan at no interest. Another option is simply reducing the loan balance. The new program can also help in removing obligation to second mortgages or lien-holders.
Because of the drastic increase in refinancing and modification activities encouraged under the new administration, many loan servicing companies are very busy working with struggling borrowers. The government and Obama administration is encouraging all those homeowners seeking assistance to remain patient as the new assistance is put into effect. The aid to homeowners is an aggressive program that is designed to work as quickly as possible, although because of the skyrocketing rates of foreclosure, it can be expected that it will take some time to work through.