©dialabank.com - flickr

©dialabank.com – flickr

Thousands of Americans are behind on mortgage payments or facing foreclosure, and the government is helping pass legislature that will encourage banks to modify loans to give struggling homeowners time to catch up.  The banking system is currently broken as is posted in the news all day long.  Credit has all but dried up completely, and with no money available to borrow, our economy will continue to get worse before it gets better.  But continued action on the part of the Obama administration will at least buy some time for struggling homeowners who have missed payments.  It is an attempt to limit the amount of borrower default and help banks work through thousands of bad loans that have tightened their lending capabilities.

If you are behind on payments or in foreclosure, it may be a good idea to contact a mortgage service company that can help walk you through a loan modification.  If you don’t modify your loan, refinance or sell the property – you will end up going into foreclosure and sheriff’s sale.  This can hurt your credit for years to come, and you may be able to keep your home and buy some time to build your credit back up.

The new foreclosure-prevention plan will encourage banks and lenders to consolidate outstanding second and third mortgages, as well as home equity loans.  With so much “creative financing” that took place during the rise in the home prices earlier in the decade, many borrowers took on second mortgages and then refinanced equity out of the property as well.  These are known as “secondary liens” meaning they are subordinate to the “senior lien” being the first mortgage on the property.  They typically carry higher interest rates and default rates have been increasing year-over-year.

The new plan will also include a government-backed loan program to encourage homeowners to refinance into a loan that is more affordable and underwritten by federal government. But thousands of issued loans were packaged as “mortgage-backed securities” and sold on Wall St., investor owners of the loans must be ok with a partial write-down of their value.  Secondary investors in mortgage securities are reluctant to write down the value of their asset, but many are finding that they would rather take the principal write-down and consequentially get the bad loan of their books.

The Obama administration is hoping that these programs and similar ones will help reduce the flow of foreclosures circulating on the books of many banks, and also give borrowers a little time to try and recover.  If you are behind on payments or looking for an alternative to foreclosure, this may be a program you want to contact your lender about.  It is not too late!  You still have time to modify your existing loan or refinance into a government-backed secure loan that will likely carry a lower interest rate and therefore have lower monthly payments.

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