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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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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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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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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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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