Objectives of Obama's Loan Modification Plan

Obama's administration announced its long awaited home stimulus plan in February 2009. The object of this package is to allow the homeowner struggling with mortgage payments and facing foreclosure to continue to live in his or her house, and simultaneously reduce the losses that the lender faces because of foreclosures. Unemployment in the US has been at all time high in recent times. Homeowners have not been spared from pink slips. Consequently, they are struggling with their mortgage payments. Added to this is the fact that there are not enough buyers in housing market, because of which prices of homes have slipped to all time lows! In this scenario, the homeowner is left with an asset that is worth less than the outstanding loan amount. Therefore, selling is not a viable option either for the homeowner or the lender. Lenders can only initiate the foreclosure proceedings, and repossess the home, but they also can't sell these homes, and unlock the capital blocked therein.

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To address these issues, Obama and his group of financial planners have asked lenders to come for negotiations and offer affordable, and sustainable refinance or loan modification to homeowners facing "Financial Hardships". A sum of 75 billion dollars has been allocated for this purpose, and it will be disbursed to the banks and lenders who provide mortgage refinance or affordable loan modifications. Homeowners facing financial constraints have to apply for either refinance, or loan modification. Eligibility criteria differ for both schemes. The refinance scheme closes on June 10, 2010, while the rest of the program will continue till December 31, 2012. The homeowner, however, may get only one chance to seek such refinance or loan modifications. Only those homeowners who are living in the mortgaged home are eligible for such loan modification or refinance.

Any such mortgage should have started on or before 1st of January 2009, and the outstanding loan including first and second mortgages should not exceed $729,500. The homeowner should have delayed mortgage payments in past, or should be likely to delay them in future because of some uncontrollable financial constraints. In addition to these, the homeowner should be able to show that he or she is undergoing some financial hardship, and the payment towards mortgage, including the taxes, installment, and insurance now exceeds 31 percent of his or her gross monthly income.

Lenders are asked to bring down the installments below 31 percent for loans through Fannie Mae or Freddie Mac. Refinance is allowed up to 105 percent of present home value. This is notable because earlier down payment of 20 percent of the cost of home was the norm. Obviously, where the value of homes is higher than the loan, such homeowners meet one of the major conditions for refinance. The stimulus plan will be kinder to people whose homes have lost almost 15 percent of their value. Those who took the home on adjustable rate mortgage can now shift to fixed interest rate bearing loans. The first time home buyer, of course get a tax credit equivalent to $8000 or 10 percent of the home, whichever is less, subject to the condition that that the home should have been purchased between 1st January 2009 and 1st December 2009.

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