Word: plan
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Under the new plan, servicers, the companies that collect mortgage checks, will be paid $1,000 every time they cut the interest rate on a loan to reduce the monthly payment to no more than 38% of a borrower's gross income. The government will split the cost of reducing the debt-to-income ratio further than that, down to 31%. Both servicers and borrowers will be paid up to $1,000 a year (for three and five years, respectively) for keeping the loan current...
...signs that it might be the kick in the pants needed to get servicers to more aggressively rewrite loans. At a mortgage bankers' conference in Tampa, Fla., on Wednesday, servicers praised the incentive structure, and Jamie Dimon, CEO of JPMorgan Chase, went on CNBC to say he thought the plan would "lead to a lot more modifications." An earlier effort to spark loan rewrites proved to be a flop, but the Administration thinks this new program could reach 3 million to 4 million homeowners. The plan also includes an endorsement of the idea that Congress might change the bankruptcy code...
...crafting the plan, policymakers had to walk a fine line between helping borrowers who have been caught off guard by tricky mortgage products and falling house prices and those who simply made imprudent decisions and genuinely can't afford their homes. In order to avoid propping up the second group, Treasury won't subsidize loan modifications that reduce the interest rate below 2%. If you can't afford a 2% mortgage, in the eyes of the government, you can't afford your house. The plan also doesn't apply to investors or people with jumbo mortgages - those, historically, larger than...
Those attempts to avoid moral hazard, though, might make the plan less effective in stemming the tide of foreclosures. "This goes a long way but not far enough," says Bruce Marks, who runs the Neighborhood Assistance Corporation of America, a nonprofit that works with servicers to restructure loans. After five years, the interest rate on modified loans can rise again, up to the industry average when the change is made, even if that pushes borrowers above the 38% payment-to-income ratio. The plan encourages but does not require servicers to make adjustments to principal balance - the generally acknowledged best...
...that may simply reflect the reality that there are a lot of people in homes who aren't going to be in them long term and that trying to keep them there is throwing good money after bad. The plan allocates money that implicitly acknowledges that: $1.5 billion to help displaced homeowners transition back to being renters and $2 billion to boost HUD's Neighborhood Stabilization Program, which lets cities and states deal with foreclosure fallout. (See pictures of the recession...