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Credit unions and other financial institutions would receive financial incentives for rewriting the terms of loans of consumers in danger of losing their homes, under a plan unveiled last week by President Obama.The president said his plan would help as many nine million homeowners who are having difficulty making payments or who can’t refinance their homes because of declining home values.The initiative includes a loan-modification plan that could affect between three million and four million homeowners and a plan to help between four million and five million homeowners refinance their homes.The program provides money to encourage mortgage servicers, mortgage investors and homeowners to work together to modify the terms of loans. It also includes a provision to allow judges to rewrite the terms of mortgages during bankruptcy proceedings. This so-called “cram-down provision” is strongly opposed by both CUNA and NAFCU, which say it would hurt credit unions financially and change the terms of previously agreed to contracts.At press time, the NCUA, CUNA and NAFCU had not responded to the plan, and calls to Prime Alliance were not returned. CU Members Mortgage declined to comment.The American Bankers Association called the plan a “constructive, flexible and multifaceted initiative likely to have a positive effect on preventing mortgage foreclosures.”The program to subsidize loan modification is estimated to cost $75 billion. Homeowners that stayed current with their payments would see those payments cut by $1,000 for each of the next five years. Companies that modified a loan would receive a $1,000 up-front fee and an additional fee of up to $1,000 annually if the borrower stays current.The goal of the plan-through options such as stretching out the repayment period and lowering the interest rate or amount of principle-is to reduce monthly payments to between 31% and 38% of the homeowner’s monthly income.The refinancing component would involve Fannie Mae and Freddie Mac. The plan would change the restrictions that limit Fannie and Freddie from refinancing mortgages valued at more than 80% of a home’s net worth.Anyone who has a traditional mortgage owned or guaranteed by Fannie and Freddie could refinance at today’s rates without making a 20% down payment.Most of the proposal will take effect on March 4, when the Obama administration is scheduled to publish the regulations. Measures to implement the cram-down provision have been introduced in both the House and Senate.Though the ABA and congressional Democrats praised the plan, conservative groups said wouldn’t help the housing market in the long run.“Having borrowers continue to pay into a bad loan, even with reduced payments, takes away money they could be using to start over. The re-default rates from existing government-backed loan modification programs indicate that they are often ineffective,” said John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, a conservative think tank in Washington.–[email protected]

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