Sheila Bair’s Loan Modification plan

With Treasury Secretary Henry Paulson giving little more than lip service to Bair’s plan, the chairman unveiled its details last month. First, housing payments for delinquent borrowers two months or more would be lowered to 31% of gross monthly income. To get there, mortgage rates could be set as low as 3% for five years, before increasing at an annual rate of 1 percentage point until they hit the prevailing market rate. Home loan terms could be extended to thirty or forty year amortization schedules in an effort to maximize the lowest possible monthly payment for the borrower. Each mortgage loan will be tested to see whether it is more beneficial to modify or to foreclose. Too many borrowers have lost years of appreciating home equity and the time for restructuring mortgages is now. New FHA loan products may help with the FHASecure and the Hope for Homeowners, but clearly these government loans are not the total solution. Not enough homeowners qualify for these FHA home loans, so more home loan modification programs need to be rolled out for those borrowers who don’t qualify for a mortgage solution.

Second, to encourage servicers and investors to participate, the government would share up to 50% of the losses if a borrower who had been helped ended up in default anyway. The risk of re-default had been one obstacle to getting lenders on board with systematic modification plans. This guarantee takes the program a step further than what’s currently being done.

In addition, the FDIC would pay servicers who process mortgages $1,000 for each re-worked loan. At a national housing forum this week, Bair reiterated how important it is to step up the pace of loan modifications. There are likely to be 2.25 million foreclosures by year’s end, Bair said, citing statistics from Federal Reserve Chairman Ben Bernanke. Usually, there are only 800,000 to one million. “We are falling behind the curve,” Bair said. “We are way above where we need to be. There are a lot of unnecessary foreclosures going on that can be prevented through more aggressive loan modifications.” Get foreclosure news quickly as it happens.

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