5 key features of Obama’s loan modification plan

Loan modification is one of the most effective ways to stay current on your mortgage if you’re not able to make your monthly payments. It can be defined as a restructured payment agreement between you and your mortgage lender. US President Barack Obama has introduced mortgage modification plan that can help the borrowers to stay current on their mortgage and avoid foreclosure.

5 key features of Obama’s loan modification plan are described below.

1. Monthly payments - According to the plan, mortgage lenders should reduce the monthly payments to 31% of the borrower’s monthly income. While doing it, the lender should at first reduce the interest rate to as low as 2%. If it is not enough to reach the 31% target, then the lenders can extend the loan tenure up to 40 years in order to achieve the required aim.
2. Declining property values - The plan states that even if the property’s value declines, the borrowers can stay at their homes as long as they’re making their monthly payments.
3. Monetary hardship - Obama’s plan is specially meant for those who are undergoing financial hardship, which is the reason behind their risk of default. Therefore, in order to participate in the given plan, the borrowers need to sign an affidavit of financial hardship and also verify their income through necessary documents.
4. Cash incentive - This new loan modification plan has introduced cash incentives for both lenders and borrowers, who agree to work on a modified mortgage. However, neither party can receive the cash benefits until modified mortgage payments have been made for a minimum of 3 months.
5. Net value test - A mortgage lender is required to perform a net value test in order to assess whether or not a loan modification may be beneficial. The lender is expected to modify such a loan that intends to produce more cash flow for him/her.

This loan modification plan is expected to reduce the number of foreclosures for primary residences. However, time can only prove whether or not Obama’s mortgage modification plan is effective to avoid foreclosure as expected.

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