The Administration is Expanding Plans for Prevention of Foreclosures

June 9th, 2009

The administration at Washington is expanding plans for prevention of foreclosures. The new steps will be offering incentives to lenders to have second mortgages modified and balances written down on the underwater first mortgages.

The Obama team is giving an all out effort to stop foreclosure for sale by offering incentives to the lenders and the borrowers so that people continue to stay in their homes. On 28th April Tuesday these announcements were made. It would be special benefit for those with first and second mortgages and are unable to carry on with either. The Treasury now expects the lenders and their agents to give the nod to modifying loans as a part of the comprehensive plans.

The treasury secretary Timothy Geithner said, “Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall.”

As per the plan the interest on the second mortgage would go down to 1% for the first five years for some of the borrowers. The plan will also revive the efforts of FHA to persuade the lenders to waive large chunks of the principal so that the borrowers get back some equity on their houses.

The funds would come from a $50 billion grant that came from $700 bail out money that Congress had released the previous year. The incentives would come from this $50 billion.

During the housing boom years many had taken second mortgages to cover a part or sometimes the whole of their down payment. These came to be termed piggy bank loans. They were given to people with dubitable credit records. Their income statements were never checked and neither were their assets. According to records about half of all the troubled first mortgages have attached to them second mortgages.

As per the new plan the loan officers as well as the borrowers would be given incentives for proper modification of the second mortgages. The loan officer would get $500 in the beginning and then $250 annually for three years during which time the loan would have to remain current. The borrowers who make timely payments would get $250 for as long as 5 years.

Lenders would be given the option of requesting the government to purchase second loans at pennies on the dollar, eliminating the obligations of the home owners.