Obama's Loan Modification Plan - Mortgage Loan Modification

President Barack Obama's Loan Modification Plan aims to help millions of homeowners avoid foreclosure and regain control of their mortgage loan payments. This plan is meant not only to help individuals with their finances, but also to help the housing industry and eventually the economy as a whole by reducing the drop in home prices via fewer foreclosures and walk-aways.

Main Points of Obama's Loan Modification Program

Focus on Mortgage Payments

Obama's loan modification plan centers on the idea that struggling borrowers will stay in their homes -- even as values drop -- as long as they're able to make their monthly mortgage payments. Billionaire chairman of insurance giant Berkshire Hathaway, Warren Buffett, endorsed this strategy in his most recent letter to BH shareholders: "Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage," Buffett wrote. "Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay."

31% - Thirty-One Percent

The administration's plan requires participating lenders to lower monthly mortgage payments to no higher than 38% of the borrower's gross monthly income. The government would assist by bringing payments down further, to no more than 31% of monthly income. In this plan, the lender would first lower the loan's interest rate to as little as 2%. If the 31 percent threshold is not reached, they would then extend the terms of the loan to up to 40 years. If 31% has still not been reached, the lender would cut the interest to zero.

Cash Incentives for Borrowers & Lenders:

To encourage participation, lenders will get $1,000 for each loan modification made and an additional $1,000 each year for up to 3 years, as long as the borrower continues making payments. Borrowers can get up to $1,000 taken off the principal (or total minus interest) of their loan each year for up to five years -- if they make their payments on time. Neither borrower or lender will receive the cash until the modified loan payments have been made for at least 3 months.

Who Is Eligible for the Loan Modification Program?

Only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents such as the borrower's credit report. In addition, the program is designed to target homeowners who are under such hardship as a loss of income, which puts them at risk of defaulting on their loans. Only loans which originated on or before Jan. 1, 2009, are eligible, and modified payments will be active for five years.

"Net Present Value"

To determine if a mortgage will be modified, the lender will perform what is called a "net present value" test. This test compares the expected income that the loan would generate if it were modified with the expected income it would generate otherwise. If the modified loan is expected to produce more revenue for the lending institution, the lender or servicer is to then go forward with modifying the loan.

Summary

The housing crisis has proven again and again the importance of being realistic -- buying only what you can truly afford -- if not, we have seen the results that surely follow. So, be responsible and help not only yourself, but everyone else.

How do you think the loan modification plan is working so far? Although in theory it would improve the current situation in the housing industry, the plan has received a mixed response. Comment below if you'd like to voice your opinion.

references: US News