Feds to back loans if lenders cut balances

By John Adams/For the AJC

Last week we looked at the President's newest loan modification initiative, designed to help unemployed borrowers as well as homeowners who find themselves owing more than their house is currently worth. I believe this program has the greatest chance of success of any attempt at lender involvement to date. Here are some questions frequently asked about the program:

Q: Why did we need another program?

A: Because previous programs simply did not have the hoped-for results. The administration has targeted "three to four million" homeowners who are having difficulty making loan payments on their principal residences. However, fewer than a quarter million have seen permanent loan modifications from their lenders.

In their defense, both government officials and lenders had hoped that the economy would begin to show signs of recovery, and that the real estate market would strengthen. Any kind of rally in the real estate market would have the effect of helping more and more homeowners.

Instead, we have seen a recession that has stubbornly persisted.

Q: Specifically, who is targeted for help and why?

A: Unemployed homeowners can apply to their lender for a "payment break" of up to six months. If approved, the lender will receive cash incentives from the government for as much as twice what was available under the old program.

In addition, current borrowers who are "upside down" on their home loan can apply to have their balances slashed to 96.5 percent of today's market value. In exchange, the new balance will carry a government guarantee of repayment.

Q: Under this program, who is left out in the cold?

A: Like all of the current mortgage bailouts so far, this program is only available to borrowers for loans on their principal residence. This will not help on loans for investment or rental homes, nor can it be used for vacation homes or second residences.

Q: How is this initiative different from previous efforts?

A: The voluntary balance reduction plan is a radical departure from past initiatives.

Q: Why is that important?

A: The idea of voluntarily cutting loan balances is simply inconceivable in the mortgage industry. In past years, lenders never considered such steps.

But no one foresaw the new wave of failed loans caused by falling values. It is hoped that lenders will come to the conclusion that lowering loan balances may be the best way to keep borrowers in their homes and stem the tide of foreclosures.

Q: Will this new initiative be successful?

A: The big question is whether lenders will choose to participate and to what degree. Most lenders will likely announce that they are "on board" with the plan, but only time will tell to what extent they implement the plan with their borrowers.

The reality is that most defaults are the result of some job loss.

Until employment numbers start to improve and the economy sees some sustainable recovery, loan losses are likely to continue.

John Adams is an author, broadcaster and investor. He answers real estate questions on radio station WGKA (920am) every Saturday at noon. For more real estate information or to make a comment, visit www.money99.com.