President Barack Obama had announced Home Affordable Refinance and Loan Modification program in order to help homeowners avoid foreclosure. These programs compensated lenders who lowered the loan payments of borrowers and most of the big lenders agreed to participate.
However, the initiative taken by the government did not work as expected. Most of the borrowers complained that they cannot reach a lender who would help them with this plan. Moreover, with a large number of people losing their jobs, most of them have become ineligible for Home Affordable Refinance and Loan Modification programs. Some people who were fortunate enough to get a modification later found out those modifications were offered on a 3-month trial basis. This has left some of the homeowners with mortgage dues which they can't afford now.
So why isn't the federal initiative working?
Most homeowners blame lenders for the failure of Obama loan modification. There are borrowers who've complained that lenders have not responded to their loan modification request. The lenders who agreed to participate in this program did not develop their own plans for loan modification. Most of the lenders are taking more than a month to respond to the borrowers regarding this plan. A recent study has revealed that most of the lenders do not want to modify the loan as they would lose money in such a deal.
Are lenders really at a loss?
According to the Obama loan modification plan, mortgages should be modified in such a way that monthly payments do not exceed more than 31% of a borrower's income. Thus, lenders will have to cut down the interest rate and principal balance of a loan. This does not mean that lenders would lose out on their money. Lenders would get a bonus of $1,500 for working with a borrower who is not yet in default.
In addition, the lenders would also get $1,000 for every loan modification they do. The incentives of the lenders do not stop here. If the borrowers keep on making payments according to the modification plan, the lender would receive at least another $1,000 for up to three years. Moreover, the federal government will also provide money to reduce the principal on the loan so the lender does not lose money for a mortgage he modifies.
There are lots of things which are unclear about the program. Most lenders are unaware as to whether they would receive the cash bonus for a modification which does not go forward after the 3 months trial period.
Have changes been made to this federal initiative?
With time, changes have been made to this federal initiative. The Treasury Department has announced a new cash incentive so that the some of the investment groups are interested to work with borrowers on loan modifications. These investment groups are those who bought mortgages bundled together as securities.
Moreover, the government has held meetings with lenders, regulators and housing counselors on loan modifications in Arizona. This indeed is a good sign for homeowners. There have been some successful loan modifications which may inspire other lenders to participate in this program.
It is expected that the federal housing plan will be modified further so that a large number of homeowners can take advantage of this program.