Government Mortgage Plan Begins

Many distressed homeowners have been eagerly awaiting the President's loan modification program. Obama first announced the program on February 18. It took several weeks for the government to clarify the terms and for the financial institutions to update their systems and start accepting applications. Many people were becoming very frustrated but now the long awaited plan is underway!!

The Treasury Department announced Wednesday the first six participants to sign up for President Obama's plan were JPMorgan Chase which will get up to $3.6 billion in subsidy and incentive payments; Wells Fargo $2.9 billion; and Citigroup, $2 billion. Also included are GMAC Mortgage, $633 million; Saxon Mortgage Services, $407 million; and Select Portfolio Servicing, $376 million. JPMorgan Chase and Wells Fargo had already begun modifying loans earlier this month. CitiMortgage just signed up for the program and will begin to process applications soon!

"We view this modification program as yet another incremental opportunity for thousands of homeowners to preserve and maintain the dream of homeownership," Wells Fargo said in a statement. The two-part plan calls for servicers to reduce monthly payments to no more than 31% of eligible borrowers' pre-tax income or to refinance eligible mortgages. The equity a homeowner has does not figure into the calculations. There is $75 billion allocated to subsidize part of the payment reduction. It will also provide thousands of dollars in incentives for servicers and borrowers to participate.

In qualifying loans the cost of foreclosure would need to be higher than the cost of the modification. The Treasury will not provide subsidies to reduce rates below 2%. The modification plan has the servicer reduce interest rates to the point the monthly obligation is no more than 38% of a borrower's pre-tax income. The government would then kick in money to bring payments down to 31% of income. The loan balance can also be reduced to bring payments down to the preferred range. The government will share in the cost, up to the amount a servicer would have received if it had reduced interest rates.

Servicers will use the Treasury funding to pay for incentives for themselves, homeowners and investors in addition to subsidizing interest rates. The program gives servicers $1,000 for each modification and another $1,000 a year for three years if the borrower stays current. If they modify at-risk loans before the borrower falls behind servicers will get $500 and the mortgage holder will receive $1500. What is unclear is whether the servicers will have to give homeowners their incentives out of their own funding shares. Homeowners will get up to $1,000 a year for five years if they keep up with payments. This will be used to reduce their loan principals.

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