Incentives are the Key to the new Loan Mod Program

by admin on February 19, 2009

Almost everyone will agree that previous attempts to get borrowers and lenders to the table to discuss loan balances has not been working. This new foreclosure prevention program by Obama is laden with incentives for the banks to give them a reason to start negotiating loan balances with borrowers.

Lenders have the ability to receive an upfront fee of $1,000 for every loan modification that they process. They also have a chance to receive what are being called, “pay for success” fees taht can add up to an additional $1,000 a year for up to three years if the borrower has managed to stay current in their mortgage.

I like the fact that borrowers get an upfront fee and also a fee strung out over time. The 3 year plan is important, because it maintains the incentive for the lender to keep the homeowner current in their loan. It’s important that lenders and borrowers realize that in most cases their interest are aligned and they should try to work together to ensure that the loan doesn’t go into arrears and eventually the house go into foreclosure. Now, not everyone will be eligible for this foreclosure prevention program and that is a good thing. Many people will not be happy to learn that they can’t apply for the program because their house is too far underwater and they can’t apply.

If you live in Southern California, Arizona and/or Florida, there is a chance that you will not be able to receive a benefit from this program, because you may owe much more than 105% of your house value. If this is the case you will most likely have to consider foreclosure or you can consider two other options:

– Negotiate Directly with Your Lender for a Loan Modification
– Hope that when more details of this plan come out that Bankruptcy Judges will receive more latitude in “cramming down” mortgages

You’ve always been able to negotiate directly with your lender regarding your loan terms so that is really nothing dramatically new. However the increased power that bankruptcy judges may be receive as a part of this new program is unprecedented and it remains to be seen how this will work. Conceivably bankruptcy judges may get the power to lower the principal balance of your mortgage and the lenders would have to abide by the ruling. Until more details come out about the foreclosure prevention program, it will be hard to see if that’s how this plays out.

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