The Obama administration's plan to help millions of homeowners avoid foreclosure by reducing the size of their mortgage payments has had little impact so far.
"So far, two months after the program went into effect, about 55,000 homeowners have been extended loan modification offers, according to a senior administration official," The New York Times reported May 13, 2009.
The administration apparently is just now putting together the details of the plan; hence, banks have been slow to move forward on modifications.
The plan intends to lower monthly mortgage payments to 31 percent of the borrower’s gross income. This would be done by either extending the loan term, reducing interest rates to as low as 2 percent or deferring principal; however, at this point not all loan modifications are reducing monthly mortgage payments.
Mortgage servicers can reduce principal, but are not required to, and most have not lowered the balance owed. In April, 29 percent of mortgage modifications actually increased monthly payments and 12 percent did not alter payments. Loan modifications reduced monthly payments only 59 percent of the time.
That mortgage modifications lower monthly payments is crucial for the plan’s success, as borrowers whose payments are not cut tend to default again within 6 months to a year.
The Times reported that experts believe that reducing the principal amount would significantly help homeowners who are “underwater,” which those who owe more than their home is worth. Being underwater is one of the most telling indicators of loan default experts believe.
RealtyTrac, a publisher of foreclosure data, reported last week that there were 342,000 foreclosure filings in April, which represents a 32 percent increase from April 2008. An estimated 2.1 million homeowners will lose their homes this year, Moody’s reported.
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