Obama Pushes for New Mortgage Modification Option with Principal Reduction
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- By Stacey Bumpus
- February 26, 2011
Underwater mortgage holders may have another chance to take advantage of mortgage modifications if a proposal by the Obama administration is approved. In the proposal, the president wants to hold mortgage servicers accountable for the foreclosure frenzy of last year by having them take a loss and reduce the principal owed or else face $20 billion in civil settlement fines.
President Hopes New Modification Plan Will Help Borrowers
In what seems to be a last-ditch effort to create relief for troubled borrowers, the Obama administration is proposing to settle last year’s issue of mortgage-servicing breakdowns by forcing the nation’s largest banks to pay for reductions in loan principal for underwater borrowers.
This comprehensive settlement would make servicers like Bank of America, Wells Fargo & Co. and J.P. Morgan Chase & Co. finally do something to make up for their mismanaged foreclosures in return for getting borrowers back on the track with their mortgages.
The settlement, which could include up to 14 servicers, would not result in a new government program and instead would offer fluid terms, allowing banks to set up their own rules about how to modify loans. So far, the terms have yet to be presented to banks and exact dollar amounts haven’t been agreed on by U.S. regulators.
Republicans Push to End Foreclosure Programs
Included in the programs they hope to eliminate is well-known Home Affordable Modification Program (HAMP), which has been criticized for not helping enough homeowners along with adding to “an era of record-breaking deficits.”
The Treasury Department admits that while more than 30,000 homeowners permanently lowered their mortgage payments through HAMP, it has failed to reach its goal of helping 3 to 4 million homeowners adjust their mortgage loans as intended.
This is partly because borrowers continuously fall out of the program from an inability to keep up with modified payments (58,020 loan modifications were canceled through December, the Treasury noted).
Could Obama’s Plan Make Up for Previous Failures?
Critics hope that Obama’s plan could make up for the problems the other programs have seen. But some are already speculating that this settlement could be just another failed attempt since it offers bankers the same control they’ve had with other programs.
The difference supporters see in this plan is that banks would have to pay the equivalent in civil fees if they didn’t help borrowers.
In the meantime, Republicans are pushing to end HAMP along with the Federal Housing Authority Refinance Program, Emergency Homeowners Relief Program and Neighborhood Stabilization Program.
While companion bills for these terminations have not been introduced in the Senate, if the president wants to ensure that troubled borrowers will receive help, it would be good to push his new program just as hard is House Republicans push their own efforts.