Foreclosure prevention program adds “cram downs” and other features to help homeowners

Since the beginning of this housing crisis many observers have argued that it will never be solved until lenders were willing — or were forced — to “cram down” the principle on the mortgages to bring them closer to the current value of the house.   In my opinion, the best way to do that would be to allow bankruptcy courts to reduce principle on primary residences.  They can do so now for boat loans and second homes and investment properties, but not on primary residences.

The financial community has fought that idea tooth and nail, and they have stopped all attempts to change the bankruptcy law.  But the concept of “cram down” is getting a new life, thanks to Bank America (which started its own program this week) and the administration’s Home Affordable Mortgage Program (HAMP), for which a series of revisions have been announced.

While there is a brief summary of important provisions below, the program details and paperwork will make you nuts (what else is new?); and I recommend that  you get in touch with a free, federally sponsored counselor to help you.  A list of local counselors is available from HUD.  You can also get names of approved  counseling organizations from the Hope website or by calling the HOPE HOTLINE at 888-995-4673.  You can also call 1-877-894-HOME (1-877-894-4663).  The Neighborhood Assistance Corporation does this work too.

The new government program, which will take some time before it becomes fully effective, has many new provisions

  1. If you are unemployed, you should be able to get a three- to six-month forbearance on your mortgage payments, after which you can apply for a permanent loan modification if appropriate.
  2. If your mortgage payments exceed 31% of your income on your residence, and reducing the interest rate does not get you down to 31%, then the lender is required to consider lowering the principle enough to bring the payments down to 31% of your income.  (Consideration is mandatory.  Action is optional, but there are incentives for the lender to go ahead.)  Your loan must be at least 115% of the current value of your house.
  3. Second mortgages (such as home equity loans) have been a real thorn in the side of anyone trying to do loan modifications.  This new plan increases incentives for second mortgage holders to settle and get out of the way.
  4. If there is no way to get the loan payments down to 31% of your income, the new rules will make it easier for you to turn over your deed and get out of your house without going through foreclosure, and without owing any balance.
  5. The new rules also provide help for homeowners who have been paying their bills but whose houses are “under water” but who don’t want to move.  Once again, the government will provide incentives for lenders to reduce principle to get loan down to 115% of current house value and reduce payments to 31% of income.

Full (endless) details are available at www.makinghomeaffordable.gov.  When I went there today there were lots of broken links but I found what I wanted in a cached copy.

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