First, the rising number of homes for sale puts a drag on home prices that will be difficult to overcome for some time. This creates a difficult environment if you need to sell your home, even as a short sale, or refinance a home loan since it keeps home prices low. Even if you live in an area that isn’t as badly impacted, your home value will suffer too. While some home ownership tracking agencies report a tapering off of new foreclosures in heavily hit areas the current inventory glut means that the recovery of home prices is going to be pushed out several years.

However, the news that foreclosures in areas where there was a significant price bubble and many sub-prime loans isn’t getting worse has to be weighed against the news that prime, mainstream, home loans are being affected at an increasing rate. Homeowners who had good credit and a once solid earnings history are now beginning to default in increasing numbers due to job loss and other such factors related to the recession.

On top of this news, banks and other mortgage loan companies are beginning to move faster on foreclosures. Last year, many were under political pressure from the Obama administration and Congress to hold off on foreclosures. Now, with the new financial reform law passed and Democrats set to lose some control in Washington after the 2010 elections, this pressure appears to be reduced. Also, bank loan analysts have had enough time to discover if a loan is worth salvaging under various foreclosure relief programs. This means that banks are more prone to enforce their foreclosure rights now than they were a few months ago. The net effect is that strategic defaults and other delaying tactics which allowed people to stay in their homes for months or even a year or more without making a payment aren’t going to work now.

Unfortunately, all of this new foreclosure activity has caused an increase in the number of foreclosure relief scams. Be wary of anyone trying to sell you a program that encourages you to use dodgy techniques to forestall foreclosure. Banks have become wise to these tricks and are moving ahead with foreclosure if they think a home loan can’t be saved.

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Under the expansion of the Home Affordable Modification Plan (HAMP), mortgage lenders who’re participating in the program will be required to offer a forbearance plan to borrowers who’re unemployed. These plans are required to be for at least 3 months duration and may be up to six months under certain circumstances. Payments, if there are any under the plan, have to be reduced to 31% or less of the borrower’s gross income.

For a homeowner to be eligible under the HAMP plan they must first meet the typical program standards which are owner occupancy, a loan balance of less than $729,750 and a loan origination date prior to January 1, 2009. Beyond this, the mortgage, while it can be current, can’t be more than 90 days overdue. Proof of receiving unemployment benefits is another requirement. Additionally, a borrower must request the forbearance, it can’t just be given automatically.

As part of the program, should the unemployed homeowner find work during the forbearance period and their regular mortgage payment would exceed 31% of their gross income, the borrower has to be given the opportunity to seek a permanent loan modification. The idea here is to move the troubled homeowner from the temporary payment reduction to a permanent principle reduction under HAMP. The Obama administration is offering lenders incentives to do this kind of loan forgiveness but banks have been slow to implement this costly plan.

Should the homeowner not qualify for a loan modification under the Home Affordable Modification Plan they are expected to fulfill their obligations under their mortgage loan. This means to pay back the difference between any reduced payments and the full payment, typically rather quickly.

If the homeowner remains unemployed or otherwise unable to make mortgage payments at the end of the forbearance period then other foreclosure alternatives would be considered such as a short sale or deed in lieu of foreclosure.

Should you wish to participate in a Home Affordable Modification Plan approved mortgage forbearance make sure that such a plan will work for you and won’t just serve as a way to postpone foreclosure and get you in a deeper hole financially.

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The traditional advice given by financial experts is for a troubled homeowner to contact their lender as soon as they begin to fall behind on their mortgage. After all, it’s assumed that the lender wants to do everything they can to avoid an expensive foreclosure. Does this assumption still hold true in today’s real estate market? The experiences of many troubled homeowners seems to indicate that this is no longer the case. They’ve found the path to obtaining a lower interest rate or more manageable payment to be very frustrating.

The cause for this is really rather simple, there’s no financial incentive for a lender to offer a loan modification to most homeowners. As it turns out, many lenders aren’t really lenders at all. What they actually are is a loan servicer. This means that they essentially take the mortgage payments and distribute these payments to the actual investors.

Most home loans over the past 10 years have been bundled and sold as an investment instrument. This has created a market for loan servicers, companies or divisions at banks, which simply manage the accounts and are paid a commission for doing so. They don’t have the legal authority to modify conditions of the loan. All they can negotiate are repayment in full plans or forbearance plans.

The actual owners of the home loan are the hundreds or even thousands of investors who own a part of many loans. They would all have to agree to change the terms of a mortgage contract and this is unlikely to happen. Thus, the loan servicer has a strong incentive to stall or delay any kind of loan modification. Why? Because they get paid a commission to do it. They get paid by the investors for their collection efforts up until the actual sale or foreclosure. However, they will not profit if a loan is modified.

The first step to avoiding frustration in the loan modification process is to determine who your mortgage holder really is. If your mortgage has been sold as part of a security, the chances of you being able to get a loan modification is rather low. In this case, you should prepare yourself for other options, such as a short sale, deed in lieu of foreclosure or a foreclosure, or find a way to bring your mortgage current and continue to keep it current.

There could be changes in the law that would remove the financial incentive for mortgage loan servicers. Several have been proposed in Congress, the Obama administration and the SEC. However, until the law is changed troubled homeowners, their communities and the actual mortgage investors will continue to have a no-win situation on their hands when it comes to mortgage loan modifications.

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The Obama administration recently announced a new plan designed to help these underwater mortgages be refinanced. Administration sources estimate that the new plan would help at least 1 million Americans refinance to lower rates. However, such government plans in the recent past have been failures. Will things be different this time?

First of all, the details of the plan and how to qualify for it are still a bit sketchy. This is probably due to it being more of a re-election campaign ploy at this point, especially considering it was unveiled at a glitzy Hollywood campaign fundraiser held in the ultra-luxury Bellagio hotel. But, here are details I’ve been able to glean so far.

First of all, Obama’s new mortgage relief plan involves a regulatory change in the current mortgage assistance plan ran by the Federal Housing Finance Agency. The plan calls for the FHFA to remove the regulation that prevented Fannie Mae and Freddie Mac backed mortgages from being refinanced when the value of the home exceeded 125% of a home’s current appraised value. This is an extension of less-than-effective Home Affordable Refinance Program (HARP).

The second part of the proposal is to extend the refinancing program through December 2013. The program was previously scheduled to end in June 2012. This part of the plan seems to be intended to allow the program to give homeowners additional time to qualify and to extend it’s effects through the 2012 election rather than having them end just months before.

The last part is that the mortgage holder has to be current on their mortgage for at least 6 months. For many people who’ve suffered job loss and other financial troubles due to the recessionary economy this may not be the case and it makes them not eligible for the program.

However, there is an even bigger problem with the plan. Mortgage lenders have no legal obligation or significant financial incentive to refinance the potentially troubled mortgages they currently have on their books. This has been one of the major problems with HARP and will remain so even with these changes.

There are many sad stories involving people who’ve tried to get refinancing on their home loans through the Home Affordable Refinance Program and still had their home foreclosed on. Banks have found it easy to string people along while dealing with their big backlog of foreclosures, extracting what payments they could by using refinancing promises while pursuing foreclosure at the same time. We can expect this trend to continue under HARP even with this expansion.

So, to recap, the plan, which is basically an expansion of the current Home Affordable Refinance Program, does offer homeowners with underwater mortgages an opportunity to refinance at lower rates, provided that they can get their lender to go for the deal. Poor credit ratings after tough times will prevent some people from pursing loans from other lenders but should one have good credit they will be able to shop around for the best mortgage refinancing deal.

It is likely that there will be mortgage brokers who will cater their business operations directly to this refinancing plan. Use caution in pursuing these deals and make sure that you aren’t being shown something that’s “too good to be true”.

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Let’s face it, there’s plenty of blame to go around. The US government encouraged and, in some cases, even required, lenders to make questionable loans. Banks and other financial institutions packaged loans into questionable and risky financial instruments. And, many homeowners gambled that house prices would continue to rise and allow them to flip a house that they really couldn’t afford. Unfortunately, this housing crisis also has affected millions of people who’ve been caught up in the mess due to unemployment and/or other financial difficulties brought on by the weak and virtually stagnant economy. Over 5 million homes have been lost to foreclosure in the past 4 years and it’s expected that 3-4 million more homes will be lost during the next 2 to 3 years, especially if the economy remains weak.

Each new foreclosure places yes another distressed property into the market. This, in turn, pushes prices lower. This is creating a downward spiral that becomes difficult for the economy to pull out of. This creates a glut of unsold homes that weighs down the housing market, hurting the sale of existing homes as well as the construction of new homes. While government tax credits for new home buyers did help stabilize the market briefly, once these incentives expired, home prices began to spiral downward again. The big problem is that as home prices drop, household wealth drops and this, in turn, causes consumer confidence and spending to drop.

The Obama administration and Congress don’t seem to have any fresh ideas to help with the foreclosure crisis and have little incentive to work together to improve things with the 2012 election cycle looming. The main thing that’s been attempted so far, the Home Affordable Modification Program, is widely regarded as a failure. This foreclosure relief program has been hampered by confusion over ever changing regulations and the refusal by lenders to undertake the most draconian recommendations such as forgiving part of a mortgage loan’s principle. Many struggling homeowners have entered trial modifications only to find themselves worse off than they were before. Many lenders are non-complainant or intentionally create bureaucratic  roadblocks for homeowners.

For example, lenders are supposed to have assigned a single point of contact to help homeowners with the red tape associated with obtaining a home loan modification. However, many lenders have not created such a contact. Others have outsourced this function to collection agencies and the like who use typical collection tactics to try to force payment. Other’s have the contact person but, at the same time, use a hired  loan subservicer to accelerate the foreclosure process. This means the contact person is simply a stall tactic or a tactic to gain more information for collectors and subservicers. Even worse, cutbacks in government programs mean that there are fewer  housing counselors available opening the door for scams as people get frustrated by long waits for help and an increasingly aggressive collection effort by lenders.

There is huge potential for the foreclosure crisis to get worse. Roughly 14 million home loans in the US are ‘underwater’ right now, many of them more than 30% below the amount owed. While these people are able to remain employed and make payments, they’ll stay in their homes for the most part. However, it also means that they’ll be cutting back on consumer spending, thus slowing down the economy. If the economy continues to sputter along or even stall, these people may lose their jobs and create a brand new surge in foreclosures.

Is there a solution to the foreclosure crisis? I don’t think that there’s an easy one. I’m no fan of government intervention and over-regulation but the average person is virtually powerless against a mega-bank that’s backed by a large collection firm or loan subservicer. I think that a combination of tax incentives and breaks, for both consumers and lenders, and regulations that prevent the most egregious practices by lenders would help. Of course, in the current political climate, I don’t see anything like this happening so hold on, it’s going to be a bumpy ride.

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These second lien mortgage payments were common during the housing boom a few years ago. These loans allowed borrowers to buy a home with no down payment by adding a second lien. Unfortunately, many of these loans are failing to due the recession and the ongoing problems in the housing and credit markets. Second lien mortgages are particularly troublesome since they typically carry a higher interest rate than the primary home loan. The idea behind the new Treasury plan is to use cash incentives to mortgage investors to encourage them to either reduce the interest rate on these loans or to simply consider them paid in full.

Previously, second liens weren’t considered in modification plans. This gap meant that there was some difficulty in renegotiating some loans under the ‘Hope for Homeowners’ plan. The idea of the new rescue plan is to bring the interest rate of the second lien in line with the primary mortgage interest rate with the hope of making the loan payments more affordable for borrowers. The Obama administration is hoping that this plan will reduce the cost of homeownership for up to 9 million homeowners who’re struggling to make their monthly mortgage payments.

These changes and some others are expected to improve the performance of the Hope for Homeowners plan. So far, the performance has been dismal and only a few homeowners have had loans modified effectively. The Department of Housing and Urban Development (HUD) hopes that this new plan that will offer mortgage holders thousands of dollars for each home loan that they successfully modify will improve the effectiveness of the program and help it meet its goal of keeping people in their homes. HUD also announced that they would be working to reduce the bureaucratic red tape involved in securing a home loan modification through the program.

It is hoped that the biggest sticking point, second liens which are sometimes called ‘piggyback loans’, will be adequately addresses by these changes. Previously there was little incentive for holders of these second mortgage loans to cooperate with a loan modification plan. The Obama adminstration is banking on these new policies to improve the situation since these piggyback loans are attached to around half of all troubled mortgages. It was common for borrowers who had poor credit scores, who did not have proof of income or who couldn’t fully qualify for a loan to take out these second liens. But, because previously there was no incentive for second loan holders to negotiate a mortgage modification plan, this made it difficult for many people to get the house payment reduction they needed. The new plan should help get rid of this oversight in the home loan modification program.

The way the plan is supposed to work is that mortgage companies would get an incentive of $500 for each loan they modified and then $250 a year for three years provided that the borrower doesn’t default on the home loan. The borrower themselves would get up to $1000 over a 5 year period to apply to the principal balance of the primary mortgage. There are some additional backend incentives to help mortgage companies recover expenses as well, such as a $2500 payment for participation in the plan.

The Obama administration has been disappointed with the performance of the plan so far. The ‘Hope for Homeowners’ plan was intended to help around 400,000 homeowners who held troubled mortgage loans replace risky sub-prime loans with traditional 30-year fixed rate mortgages with reasonable interest rates. However, the plan hasn’t worked well since the plan, as it was originally implemented, was financially unattractive to banks and it was difficult for homeowners to qualify. In fact, only one loan was modified under this plan between January and March. It is hoped that these new incentives, especially in the area of second lien mortgages, will help improve the program so that it assists more homeowners in trouble.

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This new program, Making Home Affordable, that was pushed by the Obama administration should help millions of people  attain lower monthly payments and also avoid foreclosure. But, are there any strings are attached to the program? What are the credit score implications? Are there any tax implications? How could it affect your monthly payments? Are there any scams associated with this program? Let’s take a look.

One of the first questions people ask about the federal loan modification plan if their credit score will be affected. In general, a refinancing plan doesn’t affect your score since it’s just a rewriting of the terms of an existing mortgage loan. What negatively affects your credit score is missing payments. Under the new federal housing relief plan, one of the terms is that qualifying homeowners can’t have missed a payment during the past year. So, if you’ve missed a payment, the new program won’t help you.

It’s still too early to tell how much impact the this federally sponsored mortgage loan adjustment program. There are no credit reporting guidelines in place for these home loan modifications. It’s not even clear if they will be reported at all. However, most people who’re applying for this program will have had some financial problems and missed credit card or car payments will have a negative impact on their credit report. But, in the long run, if a loan modification puts you on the right track financially your credit score will begin to improve. Just make sure that you have a sound financial plan for your own recovery, such as using the savings on your mortgage loan to pay down other debts..

One potential problem in the federal housing relief plan is that your payments might be more. For example, if your home loan is still at a low introductory rate it isn’t out of the question that you may have an increased home payment after the adjustment. However, the up side is that you will avoid any interest rate spikes that are common with subprime adjustable-rate mortgages

Mortgage lenders who’re participating in the Making Home Affordable program are required to provide you with a “good faith estimate” which will include your new interest rate, monthly mortgage payment amount and the total cost of the loan. You should compare the numbers of the refinancing offer with your current loan to insure that it will be and improvement for you.

Another question is when should you apply for this mortgage loan adjustment. Mortgage rates right now are at historic lows and aren’t likely to go much lower but are more likely to rise later in 2009 and into 2010. It wouldn’t be a good idea to wait. Also the Making Home Affordable program expires on June 10, 2010 so you should bear that in mind as well.

As for the tax impact, any charges associated with refinancing a mortgage are currently tax deductible. However, some fees, such as an appraisal or home inspection, are not. Neither are certain attorney’s fees. Also, a lower interest rate will reduce your mortgage interest deduction so you may need to adjust your withholding to account for this change as well.

Should you not qualify for the federal loan modification program you can attempt to negotiate your own refinance or modification of your loan. Many lenders are willing to work with you to help avoid a costly foreclosure. I have mentioned in other articles on this site how to handle these negotiations.

Beware of third party home loan adjustment companies. While some are legitimate there are plenty of scammers out there. Some even operate using the federal loan modification as a cover by using official sounding names or invoking President Obama’s name. Don’t pay any upfront fees or fall for other scams like this. Remember that home loan assistance is always available for free from government approved housing counselors.

I hope this article has helped answer questions you might have about the new federal home loan modification plans.

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