Details on the New Foreclosure Prevention Program

by MB on March 5, 2009

The Obama administration announced details of its new foreclosure prevention program yesterday. Interest rates on loans could drop to as low as 2% for some borrowers. The cost to tax payers is expected to be approximately $75 billion.

Under previous programs by the Bush administration, lenders were urged to voluntarily modify mortgages. Even though a large number of mortgages were modified, there were 2.2 million foreclosures in the U.S. in 2008.

Most of the largest mortgage-servicing corporations in the country are expected to participate in the program. Pending legislation, which would allow judges to modify mortgages and protect services from lawsuits, could also influence their participation.

Also, any bank that receives additional funds from the TARP would be required to participate.

Here are some specifics:

  • Borrowers with mortgages as high as $729,750 will be able to participate.
  • Fannie Mae and Freddie Mac will be allowed to refinance loans at lower interest rates, even if they lack 20 percent equity in their homes.
  • Fannie Mae and Freddie Mac will receive up to $200 billion in additional capital to finance the program.
  • For servicing companies, the government will pay $1,000 upfront for every loan they modify, and then pay an additional $1,000 per year for the first three years if the borrower stays current with their payments.
  • The government will also directly reduce the borrower’s principal balance by $1,000 per year if they stay current with their payments.

The government believes that this program could prevent as many as 5 million foreclosures.

An additional program, designed to help with “piggy-back” mortgages is said to be under development.

Borrowers who wish to participate in the program should contact the company servicing their mortgage.

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