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Obama Pushes for New Mortgage Modification Option with Principal Reduction

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

It seems Obama’s new modification proposal is right on time with news that U.S. House Republicans are looking to eliminate four anti-foreclosure programs originally introduced by the Obama administration because, according to Rep. Spencer Bachus of Alabama, chairman of the financial services panel, they are “doing more harm than good.”

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.

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  • CJ

    What a joke. If peope would sit down and actually read what a loan mod is they would never do it. First lets take the principal, interest, and fees bundle them and add them to the end of the loan. Than lets strech your mortgage to 40 years!!!! Now you are paying double to triple interest on the interest on the behind payments. More money for the banks. The lower rate adjusts every year for five years and then becomes fixed. A mod may help people at the time but it is a complete scam. Put it on paper and you will see. The principal reduction is a scam too. They will strip the negative equity and lower your principal which will help modify your payment. Sounds good to a desperate home owner right? That money never goes away!!! They check the value/mls of your home every year for up to ten years. When you get any equtiy they put it right back in your loan. Bottom line if you are in a bad situation and underwater, talk to a lawyer or financial consultant to see what your best move is. Banks are a buisness that think of ways day and night to make more money. A frustrated homeowner is usually uneducated in the inner workings of banking. Makes for a great way to make more money in my eyes. Banks dont care about your property, they dont want it. All they want is that piece of paper that makes them money.

  • http://hopetoprosper.com Bret @ Hope to Prosper

    I agree with CJ.

    Banks have completely weaseled out from their promise to modify loans for homeowners. And, the government is so incometent that they gave banks a boatload of money, with no concessions or guarantees. So, they have no leverage to make banks do anything and the banks are taking advantage.

    As for homeowners, they learned the hard way that cash from equity is just more debt. These modification programs aren’t suitable for someone on the edge financially and they aren’t a good deal for someone looking for relief. An interest rate cap for troubled homeowners would probably be the best solution. But, I don’t think the government could get that to fly with banks.

  • Don B.

    Everhome Mortgage will not reduce your interest payment when you pay ahead or pay extra on the principle. They say that they will take any extra that you pay off of the rear end of the loan so you don’t have to pay so long. Excuse me folks that still allow’s them to keep charginig interest on money you have already paid them back. They will never reduce your front end interest payment one penny no matter how much you send them. Why should that be legal ? Or is it legal ? Or can it be called legal theft ?

  • http://FinancialNews Marco A. Campos

    Banks and Government have skimmed We The People from the United States of our efforts, hard work and desire to leave our children something when we go. We paid our morgage 14 years, half the way; when this disaster came. I lost my job for only 4 months, but by the time they modified our loan, all the comings and goings of papers, them saying you don’t qualify at this time, our debt increased from 83.000.00 to 91.000.00 they fixed the interest and we sterted another 30 years, we are going to die and not be able to own the house. So, we are taking a day at a time, we will do what we can do, buy property overseas for retirement; let whatever is here go down the drain.

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  • http://gobankingrates.com roy line

    how can i get my principal reduced so i can pa yoff my mortgage?i may be underwater and do not want to lose my home. urgent retiree. thank,you