Shrinking Home Loans in New Plans from Federal Government

Now that the mortgage rates are beginning to increase, the federal government is looking for other ways to help troubled homeowners stay afloat and avoid foreclosure. One of the latest plans includes details that will help shrink the value of homes so fewer homeowners will be “underwater” in their mortgages and the ones who are still underwater will have a mortgage that is closer to the actual value of their home.

The Obama administration is setting aside $14 billion from the recent $75 billion foreclosure prevention program to help homeowners in this predicament. According to Trevor Hahn, the branch manager of Allied Home Mortgage Capital Corporation, the new plan will “help homeowners more than it will hurt homeowners.” He added that there are many homeowners in mortgage contracts who could benefit from having lower balances on their homes. The way the program is going to work is this: The government plans to pay mortgage lenders in exchange for lowering the balance of mortgages for homeowners who have been paying their bills on time. The lenders will also receive government money for reducing balances on home equity loans and second mortgages. The plan is also designed to give up to six months of financial relief to homeowners who are currently unemployed or negatively affected by the recent economic problems.

While this may sound like a great plan, critics of the administration’s loan modification program are not excited about it. Thomas Smith, president of Amerihome Mortgage Corporation, said their hearts are in the right places, but they have already messed up when it comes to the paperwork and other requirements. Supporters, on the other hand, thing the plan could help millions of Americans who want to realize the dream of owning their own home within their lifetime.

One story helps put this situation in perspective. Fred Peterson of Lynn, Massachusetts is underwater on his mortgage just like 15 million other American homeowners. He refinanced just three y ears ago and now owes more than $540,000 on a home that would only sell for about $350,000 these days. He says he just needs some “breathing room” so he can catch up on his payments. The administration’s new plan may just be that breathing room that Peterson and millions of others need in order to become current on their mortgage payments and pay off their home in a reasonable amount of time.

Do you think this new plan is worthwhile or is it set up for disaster? Let us know your thoughts below.