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Obama Calls for Change in Loan Modification Program

President Barack Obama’s administration recently overhauled its struggling foreclosure avoidance program, saying that it would require homeowners seeking to ease their mortgage terms to document their financial situation before being granted a trial modification.

Previously, borrowers were able to have their interest rates lowered and the terms of their loans extended on a trial basis without providing pay stubs and other financial documents. Banks and other mortgage customer-service providers were supposed to collect that information during a three-month trial period, with the modification becoming permanent if the borrower made three lowered payments and submitted the required paperwork.

However, few permanent modifications were yielded by the program. Servicers say a significant number of borrowers failed to properly document their situations. Homeowners say banks were unreasonable and lost documents.

Between the time the program began in the spring of 2009 and the end of December, servicers extended nearly 1.2 million offers to modify mortgages on a trial basis. However, only 66,465 troubled home loans were permanently modified, according to the U.S. Treasury Department.

The new procedure, which loan servicers are to adopt by June 1, would provide troubled borrowers with what the Treasury Department called a “simple, standard package of documents” to complete in order for servicers to determine whether the borrowers qualify to receive a loan modification.

With that determination made in advance, any borrower who made three payments at the modified rate would automatically have the modification made permanent.

The purpose of the program was to provide billions of dollars in government subsidies to encourage lenders to forestall foreclosures.

In order to obtain said subsidies, servicers are required to cut interest rates, extend the terms of loans to 40 years, and suspend payments on part of the amount owed.

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