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Mortgage Loan Modifications: What to Know About Obama's Mortgage Bailout Proposal
The Obama administration recently announced its plan to help homeowners who are overwhelmed with their current housing obligations.
They're targeting two separate classes of homeowners: Those who are paying their mortgage faithfully who would like to do a mortgage refinance but can't because the value of their home has fallen below federally-mandated thresholds. These homeowners are generally able to make their mortgage payments; the measure is designed to provide some relief.
The second class is those homeowners who in dire financial straits and can not make their mortgage payment at all. These folks will be eligible to enter a mortgage modification program.
Loan Refinancing
This is pretty straight forward. This targets borrowers with solid payments histories whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac. Currently, homeowners with a loan to value ratio of 80% or less can't refinance, so they're unable to take advantage of rates that have fallen drastically over the past year.
The proposal relaxes this rule by allowing lenders to refinance these loans even if the loan-to-value ratio has increased to 105% because of plummeting real estate values.
Mortgage Modification
To be eligible for this, borrowers must prove they don't have enough assets to make their mortgage payments. By doing so, they're eligible for several measures to lower their monthly payments.
Mortgages that are eligible must have been originated on or before Jan. 1, 2009, and are owner-occupied and primary residences for the owner. Home loans above $729,000 are not eligible.
Borrowers currently going through bankruptcy proceedings are not automatically eliminated from a mortgage modification. While the homeowner is seeking a mortgage modification, any foreclosure proceedings are temporarily suspended.
To make the home loan modifications more palatable for mortgage lenders (and mortgage servicers), the government is essentially sharing the costs of modifying mortgages.
The lender must reduce payments to 38% of the borrower's monthly income through reducing the interest rate, extending the terms of the loan, or other means. After that, the U.S. will match dollar-for-dollar any further reductions that bring payments down to 31% of the borrower's monthly income.
Loan servicers who modify loans will receive a $1,000 up-front fee for each mortgage modification and a $1,000 annual fee for each home loan that's still performing.
Homeowners making modified mortgage payments on time receive a $1,000 reduction in their loan principal each year, up to $5,000.
Lenders and investors will be rewarded for each successful mortgage modification over time: They will receive a one-time bonus of $1,500 for each modification before borrowers miss any payments. Servicers get a $500 bonus on these loans.
All of these proposals are good for five years.
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