New loan plan most likely to succeed

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 worth. I believe this program has the greatest chance of success of any attempt at lender involvement to date. Here are some frequently asked questions:

Q: Why did we need another program?

A: Because previous programs 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.

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: How is this initiative different?

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

Q: Why is that important?

A: In the past, lenders never considered steps such as voluntarily cutting loan balances. But no one foresaw the new wave of failed loans caused by falling values. It is hoped that lenders will conclude that lowering loan balances may be the best way to stem the tide of foreclosures.

Q: Will this new initiative be successful?

A: The question is whether lenders will choose to participate and to what degree. Until employment numbers improve and the economy sees sustainable recovery, loan losses are likely to continue.

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