Program to Avert Foreclosures: How It Works

The Obama administration's program to avert foreclosures has two prongs: a loan refinancing plan for homeowners whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae and the other, a loan modification plan for owners of homes that have dropped in value significantly. The first prong targets about 5 million homeowners in danger of foreclosures while the second targets about 4 million. Loan refinancing with Fannie Mae or Freddie Mac has the following requirements: The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae; borrowers must not be in default; monthly payments have been on time for the previous 12-month period; and the new loan can not be five percent more than the home's current value. Under this loan refinancing scheme, borrowers can reduce their annual loan payments by over $2,300 by refinancing to a rate hovering around 5.16 percent. The loan modification scheme aims to modify mortgage loans so that homeowners afford monthly payments and avoid foreclosures. It provides cash incentives to mortgage lenders and services and also rewards homeowners who keep up with the reduced monthly payments and stay away from foreclosures. The requirements for this scheme are the following: The borrowers must be staying in the homes described in the mortgage they are paying for; the mortgages must have been taken before January 1, 2009; and the loan amounts must not be higher than the limits established by Freddie Mac and Fannie Mae. Cash incentives are given to mortgage holders, servicers and borrowers if they cooperate to sustain modified mortgage loans to avoid foreclosur