New Incentives for Mortgage Modification Program Announced

The Obama Administration is expanding its homeowner assistance program to provide new incentives for lenders to modify at-risk mortgages and to promote remedies short of foreclosure in cases where a homeowner cannot retain the property.

Treasury Secretary Tim Geithner and Housing and Urban Development (HUD) Secretary Shaun Donovan today announced that an additional $10 billion would be provided to the administration' s Making Home Affordable for incentives to encourage lenders to modify at-risk mortgages. The new incentives would serve as a hedge against future declines in the market value of a property following a loan modification.

The move is meant to help ease lenders' concerns that granting a loan modification may only result in giving a depreciated property even more time to decline in value before it is eventually lost to foreclosure. In a declining housing market, lenders may find they are better off pursing a foreclosure right away, rather than giving homeowners more time to get their finances in order.

Lenders will be eligible for incentive payments for loan modifications that successfully complete a trial period, with the amount of the payments based on a formula that will take into account housing market declines in that particular market.

In addition, the administration unveiled new incentives for borrowers and lenders to pursue short sales and deeds in lieu of foreclosure in cases where a borrower is not in a position to retain the home through a loan modification or other means. The program is mean to avoid the expense of foreclosures and otherwise minimize the damage that foreclosures impose on borrowers, financial institutions and communities.

"If a modification is not possible, we are also announcing steps to encourage the quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future," Geithner said. "These are critical steps in stemming the foreclosure crisis and stabilizing the housing market." The new initiative is meant to streamline the process of conducting a short sale or deed-in-lieu of foreclosure, and will offer financial incentives to servicers and borrowers to pursue those alternatives to foreclosure. Homeowners, for example, may qualify for relocation expenses if they allow a property to go into a short sale rather than holding out through a foreclosure.