More aggressive loan modifications and informed consumers is the answer.

The Obama administration has taken great steps to correct the housing crisis. One of these came yesterday (March 3) when it rolled out a $75 billion plan to help homeowners who are struggling to make their payments. A major part of this plan is providing more funding for loan modifications. The question on everyone’s mind is, “Will it work”?

Based on recent numbers, about half of the borrowers who modify their loans are going into foreclosure six months later. The reason, the loan modifications aren’t enough and/or the borrowers aren’t being adequately represented during the process.

To cure the situation, the Administration is trying to help struggling homeowners get their debt to income ratio below 31% by significantly lowering the interest rate on their current loan. A much needed step if you ask me.

However, what the Administration must also focus on is how to help those who are upside down in their homes (i.e. someone who owes more on their home than it is actually worth) and behind on their payments.

Homeowners must also make sure they are adequately represented during the modification process. As sad as it is, the same mortgage companies which put many of these borrowers into subprime loans are now trying to profit on loan modifications.

Borrowers should have an attorney review the loan documents before finalizing the modification. This will help ensure that the modified loan is more advantageous than the borrower’s current situation. In many situations, a lack of independent review is what caused borrowers to enter into subprime loans to begin with.

For loan modifications to work, two things need to happen. First, the programs currently offered must be more aggressive to help borrowers lower their DTI below 31% and they must be available to those who are upside down in their homes. Second, borrowers considering loan modifications must protect themselves and be informed consumers when entering into these transactions. http://www.dfi.wa.gov/consumers/education/home_loan/loan-modification.htm