The $75 billion plan will provide incentives to borrowers, lenders and investors. The government will also subsidize interest rates.
It is estimated that 8 million homeowners are under water with their mortgages, meaning they owe more than their home is worth. It is unclear if this number is part of the 9 million owners that the bailout plan is supposed to help.
To participate in the program, borrowers must:
- have obtained their mortgage before Jan. 1, 2009;
- have a primary mortgage of less than $729,500;
live in the property;
- fully document their income by providing tax returns and pay stubs;
- sign a statement of financial hardship; and
- go for counseling if their total household debt - including auto loans, credit cards and alimony - totals more than 55% of their income.
The modification program will be in effect until 2012, but loans can only be modified once.
Servicers must try to modify a loan to at least 38% of income and the government will subsidize the rest to 31%. Interest rates can go no lower than 2%.
The new interest rate will remain in effect for 5 years then increase 1% per year until it reaches the original rate of the prevailing rate at the time of modification, whichever is lower.
If the rate modification isn't enough to get the payments to 31% of income the servicer can extend the loan to 40 years or shift principle to the end of the loan with no interest. Also, servicers can reduce the principle.