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Program to Avert Foreclosures: How It Works



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By : John Cutts    99 or more times read
The Obama administration’s program to avert foreclosures has two prongs: a loan refinancing plan for homeowners whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae and the other, a loan modification plan for owners of homes that have dropped in value significantly. The first prong targets about 5 million homeowners in danger of foreclosures while the second targets about 4 million.

Loan refinancing with Fannie Mae or Freddie Mac has the following requirements: The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae; borrowers must not be in default; monthly payments have been on time for the previous 12-month period; and the new loan can not be five percent more than the home’s current value. Under this loan refinancing scheme, borrowers can reduce their annual loan payments by over $2,300 by refinancing to a rate hovering around 5.16 percent.

The loan modification scheme aims to modify mortgage loans so that homeowners afford monthly payments and avoid foreclosures. It provides cash incentives to mortgage lenders and services and also rewards homeowners who keep up with the reduced monthly payments and stay away from foreclosures.

The requirements for this scheme are the following: The borrowers must be staying in the homes described in the mortgage they are paying for; the mortgages must have been taken before January 1, 2009; and the loan amounts must not be higher than the limits established by Freddie Mac and Fannie Mae.

Cash incentives are given to mortgage holders, servicers and borrowers if they cooperate to sustain modified mortgage loans to avoid foreclosures. For every successful loan modification, the mortgage servicer receives $500 and the mortgage holder receives $1,500. The mortgage servicer will also receive $1,000 for every year that the borrower keeps up with the modified payments for up to three years. Borrowers are also rewarded for their efforts to avoid foreclosures. They receive $1,000 for every year that they keep up with payments for up to five years.

To accomplish the loan modification, mortgage lenders need to agree to lower mortgage rates, reducing borrowers’ monthly payments to not over 38 percent of their monthly income. Lenders will then agree to reduce further the rates so that borrowers’ monthly payments become only 31 percent of their monthly income. For this second rate reduction, mortgage lenders will be subsidized by the federal government. The program will match whatever lenders give off to reach the 31 percent payment-income ratio and help avert further foreclosures.


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