Second Chance for Loan Modifications

Foreclosure assistanceTurned down for a mortgage modification? You may now have a second chance.

To stem a new wave of foreclosures, the federal government is spreading the safety net to catch home loans in trouble. The latest move comes from mortgage giant Fannie Mae, which now requires all of its loan servicers to consider "Alternative Modifications" to borrowers who have applied for help under the federal Home Affordable Modification Program (HAMP), but who have not been able to qualify for permanent modifications, according to the mortgage giant.

The program has long been plagued by delays and red tape, with servicers complaining that borrowers failed to provide the required documentation, and borrowers and community groups accusing servicers of losing or mishandling the information.

Fannie Mae's alternative modification is effectively a second chance for borrowers to permanently modify their loans and reduce their payments for up to five years, even if they've been mired in disputes with the mortgage companies over their paperwork.

Since Fannie Mae has guaranteed these loans, it is on the hook for any losses to these loans due to foreclosure. However, since the loans already seem to be headed to foreclosure, Fannie has little to lose by modifying the loans, provided the borrowers have so far been able to make their reduced payments under their trial HAMP modifications.

Many commentators and economists still predict that a wave of millions of new foreclosures will wipe out last year's wobbling recovery in home prices, pushing prices down again. In particular, economists worry the federal effort has only delayed hundreds of thousands of foreclosures -- homes that they say are likely to be seized later this year.

Since it was created last year as part of the Stimulus package, the HAMP program has temporarily modified loans terms for more than a million homeowners, often lowering monthly payments by as much as $500 a month. But as 2009 came to a close, only 66,000 of these trial loan modifications had been made permanent, according to the Treasury.

The feds have been getting tough with lenders. By the end of February, 170,000 HAMP participants had received permanent modifications on their loans. Another 91,800 had been approved for permanent modifications.

Only 88,663 trial modifications had been canceled -- but with hundred of thousands of trial modifications still waiting to be finalized, more cancellations must be coming.

So how does the alternative program work? A borrower that entered into a HAMP trial period plan prior to March 1, 2010 will be considered for the Alt Mod program as long as the servicer submits the case for approval by August 31, 2010.

The qualify the borrower needs to have made all the payments required by their HAMP trial period. If the balance of the loan outstanding is more than 80 percent of the value of the home, then income verification is not required for the alternative modification.

In April, the Treasury will also launch its Home Affordable Foreclosure Alternatives program, which will provide incentives to servicers to allow short sales and deeds-in-lieu of foreclosure. Short sales let homeowners to sell homes worth less than the balance due on their loans. The lender receives the proceeds of the sale, and forgives the rest -- which is still a much better deal for the lender than trying sell the home at auction.

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