Obama Ups Pressure on Banks to Help Homeowners

Loan servicers must detail plans to assist borrowers long-term. Laggards could face penalties and sanctions.

NEW YORK (CNNMoney.com) -- Struggling to stem the swelling foreclosure tide, the Obama administration announced new steps Monday to pressure banks to help homeowners long term.

The administration said it will require top loan servicers to report their plan to reach a decision on each loan for which they have all the needed documentation. Also, these servicers must explain to Treasury how they will communicate the decision to borrowers.

Servicers will also be required to report the status of each modification. Those failing to meet their obligations could face penalties and sanctions.

To help borrowers through the process, the administration is providing more information on the documents they need to submit to be considered for a permanent modification. Federal, state and local officials will increase outreach to delinquent homeowners.

The administration's move is its latest attempt to jumpstart its $75 billion loan modification plan, which many fear will fall far short of its goal to help up to 4 million delinquent homeowners.

A growing number of borrowers are complaining that they are stuck in trial modifications. Some 650,000 homeowners are currently in this preliminary phase, but only a small fraction have received permanent assistance.

About 375,000 people should receive long-term relief by year end, said Treasury officials in their first estimate of how many permanent modifications would be made this year. The administration is set to release its first report on the conversions in coming weeks.

Under the president's plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork.

Borrowers that qualify for long-term modifications can keep making the lower payments for five years. At that point, the interest rate will be set at the rate at the time of the adjustment, currently about 5%.

Loan servicers, however, say they are having trouble getting the necessary documents from borrowers, while homeowners maintain that their financial institutions are repeatedly losing the paperwork.

And once homeowners send in their forms, servicers may find these borrowers don't have enough income or have too much equity or savings to qualify. It also may be more profitable for the bank to foreclose on the home than to modify the mortgage.

(Article from Money.CNN.com)