New Rule Affects Foreclosure Avoidance Program

The Obama administration overhauled its struggling foreclosure avoidance program recently, saying it would require homeowners seeking to ease their mortgage terms to document their financial situation before a trial modification is granted.

Borrowers previously could have their interest rates lowered and the terms of their loans extended on a trial basis without providing pay stubs and other financial documents. Banks and other mortgage customer-service providers were supposed to collect that information during a three-month trial period, with the modification becoming permanent if the borrower made three lowered payments and submitted the required paperwork.

The program yielded few permanent modifications, however. Servicers reported that large numbers of borrowers failed to properly document their situations, while homeowners complained that the banks were unreasonable and lost documents. According to the Treasury Department, between last spring, when the program began, and the end of December, servicers extended nearly 1.2 million offers to modify mortgages on a trial basis — but just 66,465 troubled home loans had been modified permanently.

The new procedure, to be adopted by loan servicers by June 1, would provide troubled borrowers with what the Treasury Department said would be a "simple, standard package of documents" to complete so that servicers could calculate whether they would qualify for a loan modification.

With that determination made in advance, any borrower who makes three payments at the modified rate would automatically have the modification made permanent.

The program was designed to provide billions of dollars in government subsidies to encourage lenders to forestall foreclosures.

To obtain the subsidies, servicers must slash interest rates, extend the terms of loans to 40 years and suspend payments on part of the amount owed.