Loan Mod Guidelines Would Set Step-by-Step Approach

By Cheyenne Hopkins

 

The Treasury Department and federal regulators released guidelines Wednesday on how banks should conduct loan modifications. Part of a bid to prevent 7 million to 9 million borrowers from foreclosure, the guidelines are the first government effort to establish consistent nationwide modification standards. Under the guidelines, lenders and servicers must follow a “waterfall” approach to lowering payments, work case by case to determine if a borrower is at imminent risk of default and conduct additional underwriting for many modified loans. Industry observers said the plan was the government’s best one to date to stop foreclosures. The industry was also pleased the plan addresses second liens, which they said have impeded modifications so far. Under the plan, the government will provide $250 for each second lien a servicer extinguishes and may make a reimbursement payment of $1,000 to second-lien holders to extinguish the lien. “It’s too early to tell” the effect, “but it certainly helps, because second liens have been a huge part of the problem,” said Karen Shaw Petrou, managing director of Federal Financial Analytics Inc.

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