New Mortgage Regulations to Affect Homeowners in Foreclosure Program

Starting June 1, homeowners who are in the foreclosure avoidance program will need to present documentation of their finances before they can modify their mortgages. This announcement was made by the Obama administration earlier this week.

Before these stricter regulations take place, mortgage borrowers can ask to have their interest on mortgage rates lowered and they can extend their loan terms for a trial period without any documentation of their finances. Starting June 1, however, homeowners wishing to do this will need to provide several pay stubs and other financial documents in order to ease the terms of their mortgage for a modification. Under the current system, banks and other lenders are supposed to collect income and other financial information for a three month period. Following that, if the borrower paid three lowered payments and provided the proper paperwork, their mortgage modification could become permanent.

Unfortunately, the current system is not working for either the homeowners or the lenders. Lenders reported that homeowners were not providing adequate documentation of their finances while homeowners complained that banks were asking for too much and even when they did submit the proper paperwork, the banks lost it. In the months between the spring of 2009 and December of 2009, lenders offered about 1.2 million mortgage modifications to homeowners for a trial basis. Only about 66,500 homeowners received a permanent modification, according to the United States Treasury Department.

The new regulations are designed to provide a "simple, standard package of documents" for homeowners to fill out when they are requesting a modification. Lenders could use these documents to determine if a homeowner qualified for a modification. Also, once the homeowner pays three lowered payments at the modified rate, their loan would automatically be permanent.

The federal government is hoping that these modifications will help reduce the number of foreclosures occurring throughout the country by giving homeowners other options. It is backed by billions of dollars of government subsidies and it helps reduce payments to about one-third of a homeowner's household income. The government hopes this will help at least three to four million American homeowners who have gotten themselves into financial difficulties and cannot make the full mortgage payments each month.

Lenders are expected to cut interest rates and extend the loan terms to 40 years in order to get subsidies from the government to finance this program. They are also required to suspend payments on part of the overall amount that the homeowner owes on the loan. In addition, lenders will need to determine if the borrower would be better off financially by going through the mortgage modification or going through foreclosure.