Obama Loan Modification Plan Seven Part 1-3

The unrelenting rampage of the global financial crisis that is shaking the very foundations of world economies have left many suffering, especially homeowners who now can no longer afford making their loan payments. The growing number of homeless citizens is being a big burden to the economy moreover the rising rate of financial institutions closing down because of bad lending and inability to get enough cash to sustain operations.

As an attempt to stop the present conditions from further worsening and also to initiate economic recovery, the federal government has launched a very ambitious economic stimulus program aiming to rescue the housing market. This is a momentous step on the governments crusade to keeping homeowners at their homes and putting a stop to declining property values. The government had risked $75 million to the reworking of troubled loans considering the fact that current surveys say that more than half of the modified loans went delinquent again within an average of six months after loan modification. But high hopes are being put into this program as many have put hands together in engineering this gigantic plan.

Succeeding are the first three out of the seven things the government highlighted about its loan modification stimulus program.

1. Payments, not prices:
The plan centers on the belief that struggling borrowers will stay in their homeseven as values decline sharplyas long as they can make their monthly payments. Although not everyone agrees with this, billionaire investor Warren Buffett endorsed the philosophy in his most recent letter to shareholders. "Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called upside-down loans)," Buffett wrote. "Rather, foreclosures take place because borrowers cant pay the monthly payment that they agreed to pay."

2. Thirty-one percent:
To that end, the administration's plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower's gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower's monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that's not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that's still not enough, the servicer would forebear loan principal at no interest. The plan does not, however, require servicers to reduce mortgage principal, which Richard Green, the director of the Lusk Center for Real Estate at USC, considers a shortcoming. "For underwater loans, if you don't write down the balance to be less than the value of the house, people still have an incentive to default," Green says. "Writing down the principal first instead of lastwhich is what [the Obama administration is] proposingmakes sense to me."

3. Cash incentives:
To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.

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