For some homeowners who refinanced their homes in those heady days when home prices were increasing daily and loans were available to nearly anyone who could fog a mirror, a day of reckoning has arrived.  Many of the loans sold to borrowers with questionable credit or limited ability to make payments are of a type often referred to a 2/28 or 3/27 loans.  This means that the loan has a low introductory interest rate for the first two or three years with the interest rate and thus the amount of the monthly payment increasing dramatically after the honeymoon.

Senator Hillary Clinton has introduced a bill in the Senate that is intended to protect loan servicers from possible claims by investors when the servicer enters into a loan modification agreement with a troubled homeowner to remedy or prevent a default in payment under the terms of the loan.  This legislation would encourage those “voluntary” loan modifications we have been hearing about but has seldom seen.

The Mortgage Enhancement and Modification Act of 2008 sets standards for a qualified loan modification or workout plan on a residential home loan.  It immunizes the companys who actually collect and account for loan payments when they enter into a qualified loan modification with a homeowner in default, or in danger of default, from claims by the owners of the loans or their agents.

A qualified loan modification or workout plan must meet a number of criteria and is prohibited from causing a negative amortization of the loan, requiring the borrower to pay additional points or fees, and must materially improve the ability of the borrower avoid foreclosure and return to a regular scheduled payment that is reasonable for that borrower.

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