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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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The Obama administration has given lenders the “Go Ahead” to begin modifying mortgage loans for homeowner’s facing financial hardships.   The Foreclosure Prevention Plan program is designed to ease the downward pressure on home prices, keep qualified people in their homes and prevent more foreclosures.

The Guidelines for Qualifying for this Program are as follows:

Eligiblity and Qualification:

1. Loans must be originated on or before January 1, 2009.
2. $729,750 is the maximum loan balance.
3. The property must be Owner Occupied.  Investor-owned, Vacant and Condemned properties are Excluded.
4. Borrowers must FULLY document income by providing their last 2 paycheck stubs, tax returns, and must sign an affidavit of financial hardship.
5. Owner occupancy status will be verified through credit reports and other documentation.
6. Incentives will be given to lenders who modify loans for risky borrowers, who have not missed payments yet.
7. Loans can be modified only once.

Loan Terms and Procedures:

1. The modified monthly mortgage payment can not exceed 38 percent of the borrower’s gross (Earnings before taxes) monthly income. 
2. Lenders must follow steps to reduce montly payments to 30 percent of gross income.  First, the initial interest rate can be lowered to a floor of 2 percent;  Second, the lender can stretch the loan term to a maximum of 40 years;  Then, principal debt can be forgiven, but only if the lender agree’s to do so.
3. Monthly Payment Calculations must include principal, interest, taxes, insurance, flood insurance and homeowner’s or condo dues.
4. Monthly Income includes wages, salary, overtime, fees, commissions, tips, social security, pensions and other sources of taxable income.

Incentive Payments to Lenders and Borrowers:

1. Lenders will receive $1000 for each loan they modify.  They will also receive $1000 per year on performing modified loans.
2. Homeowners who pay their modified loan on time will receive a yearly $1000 principal reduction for 5 years.
3. The lender receive a one-tine bonus of $1500 on each loan they modifiy for borrowers who are current on their mortgage payments.
4. Similar incentives and bonuses will be paid to Hope for Homeowner refinances.
5. Incentives will be given to lenders who extinguish 2nd mortgages on modified loans.

Accountability and Loan Transparency:  No More Liar Loans

1. Measures to prevent and detect fraud, such as documentation and auditing requirements, are a central point of the program.
2. Lenders are required to collect, maintain and share records for verification and review.  Records include borrower eligibility, underwriting, property verification and other documentation.
3. In some cases, property appraisal will not be required. 

To verify eligibility or check requirements, the goverment has a question and answer website.  Visit Financial Stability to learn more about qualifying.

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 A new loan modification program was just unveiled that may help thousands of homeowners, that are facing foreclosure.  The loan modification program is the latest attempt by the federal government to stabilize the real estate market.  Thr program will not provide direct financial help, but it does provide assistance to those at risk of losing their homes.

The program will benefit borrowers who are at least 3 months behind on their mortgage payments, if they live in the home and have not filed for bankruptcy.

Borrower’s who fit the criteria would be offered a mortgage loan that would bring the payment to no more than 38 percent of their monthly household income.   Loan payments would be adjusted downward through interest rate cuts and longer terms of repayment.  Borrower’s would be allowed up to 40 years to repay the debt versus the traditional 30 year mortgage most of us are familiar with.

Borrower’s who are in danger of foreclosure should immediately contact the lender who services their loan.  The loan modification program was designed to be swift and efficient in stopping foreclosures.  It is expected that 1.6 million Americans will lose their homes this year, and another 1.9 million are projected to lose their homes in 2009.

Efforts by the government to work with borrowers and homeowners and keep them in their homes is good news for neighborhoods and communities.   The program is also good news for lenders and taxpayers as foreclosures typically cost the lender 50 percent of the loan value.  Ouch!

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