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The New Underwater and Unemployed Homeowners Program

The New Underwater and Unemployed Homeowners Program

The Obama administration unveiled improvements to the loan modification effort Friday in hopes of helping “underwater” and unemployed homeowners stay in their homes.

Loan servicers will receive financial incentives to reduce the principal balance on mortgages for eligible homeowners who owe more than the home is worth.

Qualifying homeowners would see their mortgage balances reduced to near current property values. The remaining mortgage debt then would be refinanced into a Federal Housing Administration (FHA) loan.

The new guidelines also offer help to jobless workers, requiring servicers to offer temporary mortgage payment reductions to eligible unemployed homeowners while they search for new jobs.

The goal is to help 3 million to 4 million homeowners between now and the end of 2012, according to a recent U.S. Treasury Department Release.  “These program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own,” the release says.

The government says “it will take time” to implement the new measures. Changes should begin within a few weeks, with the full scope of adjustments scheduled to be in place by the fall.

How it works

Underwater Homeowners  who qualify for a mortgage reduction may receive a mortgage principal reduction with a loan modification through the federal Home Affordable Modification Program, commonly known as HAMP.

Servicers may elect to forbear as much as necessary of the principal balance over 115 percent of the property’s current value to bring the monthly payment down to 31 percent of income. Servicers then will forgive the forborne amount in three equal amounts over three years, so long as the borrower remains current on payments. After the borrower has successfully made the modified mortgage payments over the initial three year period, the forborne balance would be 100% forgiven.

Under the new guidelines, servicers are not required to offer mortgage reductions. However, the federal government will offer financial incentives to servicers who do participate. Loan Modification approval is obtained when the proposal is in the best financial interest of the investor. If the Net Present Value (NPV) of the modified loan is greater than the NPV of the existing defaulted mortgage, the investor should approve the Loan Modification, even if the principal balance is reduced.

“We are providing increased financial incentives and expect that where principal write-down yields a greater economic benefit … lenders will generally choose to pursue the principal reduction option when they are legally permitted to do so,” says a document at the federal government’s Making Home Affordable Web site.

The new guidelines also offer help for eligible unemployed homeowners, who would be allowed to reduce their mortgage payments to no more than 31 percent of monthly income for a minimum of three months and for as long as six months.

After this period, borrowers will be evaluated for a HAMP modification if their mortgage payment is greater than 31 percent of monthly income and they meet other income and property eligibility requirements. Those who do not qualify must be considered for an alternative to foreclosure, such as deed in lieu of foreclosure, other loan workout, or a short sale.

The federal government will share the cost of the expanded program with the private sector. No new federal money will be used to fund the program changes; instead, the $50 billion federal share of the money will come from funds already allocated to the Troubled Asset Relief Program.

Who qualifies?

It remains unclear precisely who qualifies for mortgage principal forgiveness; however, if you are able to qualify for a loan payment at your property’s current value, you should look into this program.

For a FREE Property, Income and Loan Disposition Analysis, please contact CNA Financial, Inc at (800) 519 – 6038 or www.cnafinancialcorp.com

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