How the Bailout Could Help You

The $700 billion economic stabilization bill that just passed Congress may not save the stock market or revive the economy.  However, through loan modifications and modified refinance initiatives, it could rescue lots of homeowners who are at risk of losing their homes to bank foreclosure.

The stock market has recently lost nearly half of its value.  What's more, sandbagging problems in the financial sector with taxpayer bailouts and rescue plans has so far failed to put a floor beneath the crash. But the $700 billion economic plan may help to keep roofs over the heads of many American families through aggressive loan modifications and modified refinance strategies intended to stem the tide of foreclosures.

The rescue effort

Homeowners at risk of foreclosure benefit from provisions in the far-reaching rescue plan that specifically ask lenders to offer modified mortgage terms to their customers. The main goal of the rescue effort, according to many economists, should be to bring mortgage balances more in line with the reality of current home values, and make monthly payments more appropriate to the repayment capability of borrowers. Those basic concepts were abandoned in recent years, as banks loaned money to people who couldn't afford their high-priced homes, and then gave them easy credit and cash through various refinance schemes.

But, as the head of the Federal Deposit Insurance Corporation (FDIC) has been urging for months, lenders may now want to cut their losses by offering generous loan modifications, even if that means freezing or lowering interest rates or reducing principal balances. Otherwise, the loans will simply become more toxic and lead to foreclosure, which will cost lenders even more.

Loan modification strategies

The possibilities for loan modification are many but, because banks have been in financial trouble, they failed to take a proactive approach to loan modification when the strategy was first suggested. Now, with the financial backing of taxpayers and the Treasury, they're more willing to get serious about saving homeowners.

A lender might, for example, amortize a modified mortgage over a longer period of time to lower monthly payments. Or a loan modification could keep a mortgage rate in place instead of triggering a previously scheduled adjustable-rate mortgage (ARM) reset. Modified refinance loans, for instance, could allow a homeowner to refinance a first mortgage without having to first pay off a small second mortgage. Another option for the lender is to use an extreme loan modification by forgiving part of the loan balance, and then offering a new mortgage based on the current appraised value of the home.

Hope on the horizon

The organization Hope Now, an alliance of mortgage servicers, counselors, and investors, has saved more than two million homes through modified refinance or loan modification programs. During the month of August, nearly 200,000 homes were saved through workouts coordinated through Hope Now.  More than 75 percent of the loan modifications last for at least five years, which should give homeowners and credit markets time to get back on solid ground.