Loan Refinancing or Modification to Help Foreclosure Victims

May 28th, 2009 | Tags: Foreclosure

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Making Home Affordable has two segments. Loan refinancing or loan modification targets help to foreclosure victims. It is hoped that about 9 million families will benefit.

Those that are under the cover from FHA (division of HUD) and Department of Veteran Affairs will not come under the umbrella of Making Home Affordable. Their loans, according to guidelines laid out in FinancialStability.gov, will be “addressed through stand-alone modification programs run by those agencies.”

FHA insures the maximum number of mortgages counting to nearly 4.8 million. It has a cocktail of strategies to tackle losses. Before FHA forecloses the servicer has to try these out on the borrowers. There are some options – reduction of rates of interest or suspension of payments for the time being. These efforts assisted 64% of the borrowers (90 days delinquent) of FHA in 2008 to escape foreclosure.

Hope for Homeowners created by Congress in 2008 summer is linked with FHA. Generally FHA would not insure any loan that has negative equity. Hope for Homeowners gives encouragement to the lenders to lower the principal amount so that the borrowers can refinance into a better mortgage agreement with FHA. However this programme of Hope for Homeowners has proved to be a total failure – admitted also by HUD. As yet only one borrower has been able to benefit.

The primary reason for this failure is that the borrowers have to pay steep fees to join the plan. The lenders too do not have any incentive to suffer losses and agree to it. Efforts are being made to rectify these defects by introducing a bill (9) that would give monetary benefits to the tune of $2,500 for each refinancing that is completed. The bill has not yet become law and its fate is hanging in the senate.

VA insures nearly 1.3 million loans and it too has various options to tackle the problem of losses. It is especially helpful to those veterans who have lagged behind in their payments. Servicers are drawn into its operations so that foreclosures can be avoided. If the servicer is tardy in response VA purchases the loan and modifies it independently by itself. In the latter case the same guidelines as the Obama loan modification programme will be followed said Bill White who specializes and supervises VA loans.

The Rural Housing Service also guarantees some home loans. The biggest in the market are Fannie Mae and Freddie Mac who have together rolled out a new plan that will be replaced by the plan of the administration.