People all over the country find themselves in serious trouble nowadays. House pricing is going down, and the number of nationwide layoffs are rendering a larger number of people than ever unable to make their monthly mortgage payment. Effective March 4, 2009, Obama’s home loan modification plan identifies at-risk homeowners and works with them to keep their house from being foreclosed.
This new plan from the White House differs from older efforts by lending institutions to address borrowers that were falling behind on payments. The President’s Making Home Affordable plan gives lenders a consistent, logical process to follow when modifying home loans to lower monthly payments. Doing so increased the ability of homeowners to pay and in many cases circumvents a foreclosure.
When a lender identifies a homeowner as an at-risk party for foreclosure, their first step is to consider whether a Hope for Homeowners refinance is an option. This is a special refinance option under Obama’s Making Home Affordable plan. If they are not eligible for refinance, they begin the loan modification process.
Loan modification ultimately depends on a homeowner’s gross monthly income, so the first step is to calculate and prove monthly income. For this, last year’s tax information, two pay stubs, or a letter from an employer is necessary. After verifying income, lenders follow the standard process known as the Standard Waterfall to reduce the borrower’s monthly payment to 38% of their gross monthly income.
Under the Standard Waterfall, the lender must first decrease interest rates. These deductions are made in increments of 0.125%, all the way down to a floor of 2% interest rate if necessary. If that does not allow the monthly payment to be less than the 38% target, the loan can be extended as many as 40 years after the time of modification. If the 38% target is still not reached, then the lender may choose to forgive loan principal. However, the lenders by no means have to forbear principal if they do not want to. It is only an option for them to meet the 38% threshold.
In return for pointing out at-risk homeowners and getting them modified loan terms, participating lending institutions get a one-time incentive of $1,000. They also receive successive payments of $1,000 per year (for up to three years) for modified loans that are successfully paid and current. Homeowners also receive incentive payments. They can get up to $1,000 a year for up to five years for honoring their new modified commitments every month and staying current on their loan.