Cramdown bill may have faded but a federal foreclosure program is realizing success

Despite the defeat of the mortgage cramdown bill that would have allowed bankruptcy judges more power to renegotiate mortgages on behalf of those seeking relief, the Obama administration is realizing some slow success with its heavily touted foreclosure prevention program.

Mortgages eligible for the program started to be serviced last month and to date, 55,000 home loans have been subjected to modification as a way to alleviate the financial pain caused by sub-prime loan interest rate spikes. Based on the early success, the administration announced that the $75 billion dollar program is being expanded and will offer additional incentives for lenders who participate and to homeowners in need of relief.

The incentives involve the government subsidizing interest rate reductions. The idea is to push the amount of the monthly mortgage payment to less than or equal to 31% of a homeowner's pre-tax income. Before the rise of sub-prime mortgages and abnormally low interest rates, that percentage was a benchmark for mortgage qualification.

Going forward, the program will encourage short sales in conjunction with loan modification. A short sale occurs when a lender agrees to sell a home for less than what is owed (or for less than market value) to avoid foreclosure. Essentially, the parties arrive at a settlement between what is owed on the mortgage and the price of the property. Many real estate agents have jumped into the short sale market of late and it appears that President Obama's program will do more to encourage the strategy.

Banks and mortgage service providers have been reaching out to homeowners who may qualify for the loan modification program, which is defined by having a loan of not more than $729,750 that was originated before January 1, 2009 and is currently in default or at risk of default. That risk can be attributed a sudden loss of income or drastic jump in expenses. Given the nation's current unemployment numbers, the number of homeowners who will be able to qualify should continue to climb.

Even though the program was created to help struggling mortgage holders, there has been widespread reporting of bureaucratic headaches associated with the modification efforts. However, many attribute the delays or poor service to the speed at which the rules and process were put in place. It can be argued though, that timing was critical and that if the administration delayed the program, countless families would have lost their homes. Basically, every day help was not available, the crisis would grow worse. Last month alone, 342,000 homes received a foreclosure filing. As job losses continue to mount, the number of at risk homeowners will continue to increase, putting greater and greater pressure on the program.

A reason for the recent announcement about expansion was to also reassure service providers and those seeking help that changes are being made and that those offering help are being incentivized to be keep things moving smoothly. Given the dire economic situation, there simply is not enough manpower to help everyone immediately. Another possibility is that some servicers may simply be dragging their feet until it is too late for the borrower to get help. However, keep in mind, bankruptcy is always a viable option if modification is simply not working out. A properly planned Chapter 13 bankruptcy will immediately halt a foreclosure and allow you and your family to stay in your home to catch up on your mortgage payments. Contact a bankruptcy attorney today to discuss your options. Serving North Carolina residents, John T. Orcutt's can help your family in these tough times. Call today to set up a free consultation in 4 convenient locations: Raleigh, Wilson, Fayetteville and Durham.