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Loan Modification Loophole Leaves Taxpayers on the Hook

Wednesday, March 18, 2009 posted by Tommi Crow

While I am sure that all Americans appreciate the efforts being made in Washington to save us from ourselves… they have again overlooked a simple requirement for loan modifications which could cost taxpayers billions of dollars.

Much like the “overlooked” loopholes that allowed bonus payments, in excess of $160 million, to be paid to employee’s of Goldman Sach’s and AIG, the Obama loan modification program sets up the same windfall profit situation, without regulation, for the financial institutions who modify loans.

Under the guidelines for the loan modification program, lenders are being offered taxpayer incentives (money) to modify loans.   These cash incentives provide a huge Boom to the mortgage lending business, but unfortunately for taxpayers, some crucial regulations are missing.  Does this sound familiar?

One immediate loophole that needs to be closed is the issue of how the borrower will qualify for their new, reduced loan.   The Obama plan gives lenders incentives (ie: taxpayer money) to bring a borrower’s monthly payments down to 31 percent of their gross income.  However, the plan totally ignores the amount of other debt that the borrower can have. 

Why is a borrower’s debt important?  If a homeowner has excessive credit cards, car notes, college loans or other debt, with substantial monthly payments, they may not be able to afford even 31 percent of their income for a modified mortgage payment.   Under the present program guidelines, lender’s would be still be paid to modify a loans for borrower’s who would not qualify for a loan, if their debt was considered.

In order for the Obama housing plan to work, changes must be made.  If not, taxpayers should expect another fiasco, like the ones we a discovered after AIG, Goldman Sachs and the automakers used their taxpayer bailout money for bonuses, trips, jets and office remodeling.

To date, over 50 percent of all modified loans have fallen back into default and the foreclosed homes are showing up on the market.   Before the taxpayer’s pay out billions of dollars to unregulated lenders, as an “incentive” to modify loans to keep people in their homes, let’s make darn sure the borrower doesn’t have so much debt that they can’t repay their loan, again.   After all, how much debt a borrower has is a standard measure used to qualify for a typical loan.  Why is the borrower’s debt ratio being overlooked, when taxpayer’s are on the hook?

If you agree, write to your congressional representative.  There is still time to “modify” our guidelines for lenders.  Hopefully, with a little public outcry, this loophole will be eliminated before we hear that billions have been paid for modified loans that fall back into default in record time.

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