The Obama Administration is acting aggressively to battle the slumping economy. One industry in which it has focused its attention is banking. Toxic assets touched off our current credit crunch, so the administration has rolled out a loan modification program to ease the rising foreclosure rate.

The rising foreclosure rate has become a hallmark of the current recession. The "Making Home Affordable" program is a top priority for the Obama Administration. They believe that once the rising tide of foreclosures stops, and the toxic assets are removed from the banks' books, the economy will stabilize. A modified mortgage program has been launched with the intention of making homes affordable. The following details will help you see if you qualify.

Modified mortgage lowers payments

President Obama's loan modification plan centers on making housing payments lower, paring them back so that they'll be no more than 31 percent of the borrower's monthly income. To reach this level, the lender will be required to reduce the loan's interest rate, all the way down to a rock-bottom 2 percent. If that doesn't do the trick, the lender can extend the term of the loan, for as long as 40 years. If that still doesn't reach a level lower than 31 percent, the servicer could forebear loan principal at no interest.

The 31 percent could be a very difficult number for many individuals who've lived beyond their means with credit cards. The number is based on a borrower's gross monthly income, before any payroll deductions are made. It also includes real estate taxes, condo fees, and home and flood insurance. If people have acquired consumer debt levels that push their overall debt past 55 percent of gross income, they'll be required to get debt counseling.

Paying lenders to participate

How do you get lenders to respond to this type of write-down? Pay them, of course. Servicers will be paid $1,000 dollars for each modification, and then receive another $1,000 each year that the borrower stays current on the mortgage. The borrower will also receive a reduction in his mortgage principal if he makes payments on time.

The determining factor for a loan modification will be a nifty little calculation called a net-value test. When a loan modification can generate more cash flow for the lender than an unchanged loan, a modification will be required. (This inspires the lender to act, rather than to sit on a property.) This is a win-win situation for the lender and borrower alike. It keeps the borrower in his home, and it enables lenders to avoid foreclosure procedures as well as netting them cash.

A variety of other conditions exist for a loan modification, including financial hardship. Consult with your lender to determine if you qualify. A word of advice: Get started sooner than later on your loan modification. With foreclosure rates on the rise, lenders are expecting an unprecedented increase in demand for the new program.

Published on April 5, 2009