Obama’s New Loan Modification Plan Guidlines: “Making Home Affordable” Act to Lower Payments, Prevent Foreclosures

The Obama administration’s Making Home Affordable (MHA) plan went into effect March 4, 2009. That means troubled homeowners may be able to get their lenders to adjust their mortgage loan terms and decrease their monthly payments.

Overview of Making Home Affordable

With the current economic recession, many people are suddenly unemployed or forced to take pay cuts. This leaves them unable to pay monthly payments on their mortgages, and American foreclosures have reached record highs. In an effort to help stabilize the housing market and the economy, the President introduced the MHA plan. This plan includes a $75 billion Homeowner Stability Initiative to facilitate successful loan modifications and prevent.

Objectives of Loan Modification

Many homeowners have experienced a decrease or loss of income during this economic recession, and their monthly mortgage payments have suddenly become too high a percentage of their income. MHA loan modification aims to work with lenders to get eligible homeowners’ payments to 31% of their gross monthly income.

Procedure for Adjusting Loans: The Standard Waterfall

Lenders participating in the MHA plan need to follow a procedure called the Standard Waterfall in order to receive Homeowner Stability Initiative dollars. According to the Standard Waterfall, lenders modifying loans must:

  1. Perform interest rate reductions to get a borrower’s monthly payments to 38% of their gross monthly income. The rate is reduced in increments of 0.125% down to a floor of 2%.
  2. If the goal of 38% of gross monthly income is still not reached, the lender may extend the term of the loan up to 40 years from the time of modification.
  3. If the goal of 38% of gross monthly income is still not reached, the lender can begin to forbear principal (due in a balloon payment upon maturity of the loan).
  4. After the lender gets the payment to the 38% goal, the U.S. Treasury will match further reductions dollar-for-dollar until the new monthly payment is within 31% of the homeowner’s gross monthly income.
  5. There will be a 90-day trial period with the new loan terms. If the homeowner is still current at the end of the three month period, the modified terms will stay in effect for the next 5 years.

Lenders are not forced to participate in MHA loan modification. They are asked to analyze whether modifying the loan as described above would be more profitable than foreclosure, and to choose the more profitable option.

Monetary Incentives Under Making Home Affordable

The MHA plan includes financial incentive payments, both for lenders and borrowers. Lenders receive a Servicer Incentive Payment of $1,000 for each eligible modification in addition to Pay for Success Payments of up to $1,000 per year for 3 years as long as the borrower stays current on the modified loan.

Homeowners also receive Pay-for-Performance Success Payments of up to $1,000 a year for up to 5 years if they make on-time monthly payments on their modified mortgage loan. These payments go straight to reducing the principal balance on the loan.

Eligibility Criteria for Loan Modification

To qualify for loan modification under MHA, you must meet the following criteria:

  • your monthly payment exceeds 31% of your gross monthly income
  • your loan is insured by Fannie Mae or Freddie Mac
  • your loan originated before January 1, 2009
  • your loan has an unpaid principal of less than $729,750
  • you are the primary occupant of the home (not an investor or house flipper)

The Making Home Affordable plan is the President’s attempt to steady the economy by avoiding millions of foreclosures nationwide. Under the Standard Waterfall, qualifying borrowers’ monthly mortgage payments can be reduced to 31% of their gross monthly income.