We learned yesterday that President Obama announced a plan to help homeowners avoid foreclosure which involves two different initiatives.

1) A refinance program that will help for homeowners who have played by the rules (made their payments on time) but have been unable to refinance because they owe more on their home then it is worth.

2) A loan modification program that is designed to keep troubled homeowners out of foreclosure and to keep “at risk” borrowers from defaulting in the first place.

Although lenders are not required to participate the plan is designed to entice the lenders and mortgage services by offering new incentives.
Since the loan-modification plan does not mandate lenders to take part in either program it will require banks and financial institutions to follow the government’s protocols who have received capital under the government’s $700-billion financial bailout program known as TARP. Other lenders can use their own discretion when offering these types of loans.

To be eligible:

1 -The home must be a borrowers primary residence
2 -The loan must be a conforming loan (at or below $417,000) and guaranteed by Fannie Mae or Freddie Mac.
3 -Borrower does not need to be behind in payments (in fact a mortgage servicer will be paid a higher incentive fee if a modification is done before a borrower falls behind).

What the Plan does not do:

1) The plan will not require participating lenders to reduce the principal on a borrowers mortgage because the home has lost value. The modification will act to lower monthly payments, (by lowering rate or extending the term) but the homeowner’s outstanding debt will probably not change.
2) The plan will not help borrowers with “jumbo” mortgages—any loan above $417,000.
3) The plan does not include second mortgages, such as a home equity line of credit, any modification or refinancing would apply only to the first mortgages.
4) It is not targeted to help non-occupied borrowers who have “investment” properties as it only applies to primary residence.
5) The plan does not mandate lenders to participate.

It has been reported that the number of borrowers who are in “trouble” on their mortgages has risen from 10 million to 15 million, yet the plan may only help 7 to 9 million. As you can imagine there are some good things here yet officials acknowledge that the plan will not help all borrowers or prevent all foreclosures. The policies of the plan are to be released on March 4th 2009.