Loan Modification Programs - Talk of Federal Guarantees

As the American housing market continues to sink, the Federal government may implement another rescue plan to offer incentives and guarantees for loan modification programs. The new plan would serve as an inducement to lenders to modify home loans for delinquent borrowers facing foreclosure. Foreclosure is time consuming and costly for banks, and continue to place downward pressure on the housing market.

FDIC Chairman Sheila Bair told a Senate panel that a proposed plan is in the works to offer federal loan guarantees and credit enhancements to encourage lenders to offer loan modification programs. The current voluntary program is not working and lenders are continuing to fall behind. Realty Trac announced that foreclosure filings in the third quarter were 71% higher than the same period last year.

Declining to mention any specific dollar figure for the program, it has been reported that somewhere around $40 billion was being considered for funding. Under the terms of the $700 billion banking bailout passed earlier, the Treasury Department can use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. The government could establish standards for loan modifications and provide guarantees for loans meeting those standards. The incentive is to provide long term, sustainable loans for homeowners to prevent future defaults.

The challenge has been that the loan servicers who work directly with the homeowners on behalf of the investors, have competing interests that impede loan workouts. Mortgage investors stand to lose money on loan modifications and have been reluctant to offer any wide ranging loan modification programs. Chairman Bair's proposal of federal loan guarantees would provide incentives to overcome the aversion to loan modification programs by investors. These guarantees and incentives would increase the likelihood of lenders choosing loan modifications over foreclosures. Foreclosure is a costly and time consuming process that results in a continued downward pressure on the housing market values.

Loan modifications are currently voluntary and at the discretion of each lender. Distressed borrowers have complained that help has been slow in coming, with many lenders inundated with applications from homeowners seeking to modify their loan. Typically a loan modification program will employ one or more of these options to arrive at an affordable monthly payment:

* Rates reduced to as low as 2%
* Payments featuring interest only options
* Principal reduction to 95% of the homes current market value
* Extending or fixing the initial "teaser rate"
* Late fees waived
* Waive prepayment penalties

Main Street balked at the billion dollar bailout for Wall Street, however using some of those funds to directly help homeowners is a policy that most Americans would support. Sheila Bair has stated that the Federal government is working with the Treasury Department to reduce the number of foreclosures and keep people in their homes. She believes the government needs to get involved to create a streamlined process to modify troubled home loans. The Treasury Department has confirmed that loan guarantees were possible but would not say when a plan would be ready.

You can learn more about loan modification programs by ordering and downloading The Complete Loan Modification Guide. This is a low cost, easy to read handbook that will provide you with everything you need to prepare a professional and acceptable loan modification application. Not every borrower will qualify for a loan modification, so before you contact your lender make sure you have all the information you need. Be prepared so you will be able to meet your lender's guidelines. The Complete Loan Modification Guide takes you step by step thru the application process - you can get the help you need to get back on track. Order and download The Complete Loan Modification Guide today.

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