Back in March, the Obama Administration rolled out its loan modification plan and this news report details seven key points of the plan:
Homeowners default because they cant make their payments
Loan services are required to reduce payments to no more than 38% of income while the government will chip in to bring that down to 31%
Both loan services and homeowners will receive cash incentives for modifying loans
Only owner-occupied residences qualify
A loan service can make its decision on which loans to modify by putting a property through a “net present value test”
Incentives will be offered to life second liens
There is an expected increase in foreclosures among investment properties
While some parts of this plan are still murky, it does show some promise to save many homeowners from defaulting on their loans and being foreclosed upon. But these homeowners will still need to get a forensic loan audit in order to prove to their lenders that they qualify and deserve a modification to their loan.
The important thing for homeowners is that they can get relief from their over-sized income-to-debt ratio. Most homeowners default on their loans because they cant afford their monthly payments. As Warren Buffet has stated, it isn’t because the value of the home has declined. Most homeowners recognize the need a place to live and the best place is where they currently reside. So if they can have their monthly payments reduced to a comfortable level, they will keep their home and stay there while continuing to pay on a losing proposition.