When the foreclosures started piling up, investors on Wall Street didn’t want to buy these MBS, which dried up bank’s and lender’s continual cash resource from the investor markets. The dried cash pools prevented lenders from mortgage lending. The White House administration pledged $1 trillion dollars to the buy those unwanted MBS, so that lending could continue and keep the housing market alive. The federal government’s involvement allowed mortgage interest rates to fall from 6% to its lowest 4.7% within a year of its involvement and made the volatile housing market an attractive bet as the government announced a healthy profit from its investment into the housing market.

The US Treasury department believes the federal government’s involvement into the housing and MBS markets was supposed to be short-lived and its purpose now completed. Although, many believe it’s too early for a government pullout of the fragile housing market because sales are low and the economy is ailing, but investors and housing market professionals could easily become reliant on the government’s presence and never allow the markets to fully strengthen to a self supporting level.

The mortgage loan modifications were supposed to reduce the mortgage interest rate thus providing a lower payment for three months. At the same time borrowers were to provide financial documents to include an explanation of hardship. Banking officials are responding that many homes placed in a temporary plan failed to make timely payments for the temporary period or simply failed to provide paperwork. Lights of a recovering real estate market could be dimmed if the foreclosure crisis isn’t contained before another wave of adjustable rate mortgages reset in the new year.

Additionally, housing prices are up for the fourth consecutive month and serve as an additional sign the nation’s economy is waking up. Although housing prices are lower than last year this time, durable goods orders are lower than expected, and a steady increase of gas prices, any trace evidence of positive movement of the world’s largest economy is enough to promote investment in the nation again… translating to more jobs and economic growth for all…hopefully sooner than later.

1. Don’t ignore your mortgage problem – If you are unable to pay your mortage, dont hide from your lender. Call them and try to work out a plan to keep you current and in the home. If your lender is unwilling to speak work with you then visit a housing counseling agency. Many times these services are offered through your municipality.

2. Know the terms of your mortgage – Oftentimes homeowners are unaware of the type of mortgage they have, let alone the terms. Keep all mortgage closing documents close by when talking with your lender.

3. Know Your Options – When faced with the inability to pay the mortgage, the homeowner has a plethora of options. From selling the home, mortgage modification to taking in a tenant; speaking with a variety of real estate professionals can give you some ideas to as to the plausibilityof your options. Also consider how you can cut back on monthly expense…including having your hazard insurance policy shopped for a cheaper rate and having your home reassess to possibly lower porperty taxes. And if you are considering bankruptcy be sure to speak with a few attorneys before making any final decisions.

4. Beware of foreclosure scams – Negotiating a modified mortgage or short sale while the stress of losing your home looms over your head is not easy. However, don’t fall victim to scam artists that will request up front fees to “fix” your problem. There are some good housing counseling companies that have well serviced their clients, but talk with several referred real estate professionals as well as the various local goverment housing assistance departments and you may save yourself time and money. If you feel you have been preyed upon by a “foreclosure prevention” company, contact you State’s Attorney General’s office and the Federal Trade Commission immediately.

5. Know Your Ability and Live to It – Whatever plan you are able to work with the mortgage company should reflect your input on not what you think the mortgage company wants to hear, but what you can realistically afford and consistently pay. The banks would rather get regular lower payments than a few sporadic larger payments. And by all means, stick to the plan worked with the mortgage company.

Currently, Congress is considering increasing the minimum down payment for a government backed FHA mortgage to 5%. That means if a home is selling for $150,000, a mortgage applicant would need to place at least $7,500 as a down payment. A little more than a year ago the minimum down payment for FHA mortgages went from 2.25% to 3.5% as a response to the high ratio of foreclosing homes…although the majority of defaulting mortgages were with creative and exotic mortgage products held by the banks. Raising the down payment minimum will lengthen the time for home purchasers to save for a home, while possibly slowing a still depressed housing market.

Additionally, the $8,000 tax credit to first time homebuyers is about to expire in November. This $8,000 credit has breathed a significant amount of life into declining housing markets and has helped thousands achieve the American Dream of homeownership. However, Congress is discussing the option of extending the tax credit.

So as you can see, without at least a proper understanding of Congress’ actions, a person saving to purchase a home next January, could be heavily disappointed by the lack of an $8000 tax credit and the need for an additional $2,250 towards a down payment, when using the aforementioned $150,000 home price.

As most modifications go, the homeowner wants the payments (and probably the principal) reduced to make the home affordable and the lender wants the loan paid on time or in full. According to various non-profit mortgage associations, rarely has the principal been written down on loan modification request. The lender will temporarily reduce the interest rate and even extend loan term to 40 and even 50 years. However, in loan modification cases that fail to reach an affordable level for the homeowner, a short sale is usually recommended to prevent foreclosure. The short sale will sell the home at a discount often comparable to foreclosure levels. The lender accepts the reduced sale price for the home without having the cost of foreclosure to bear and the homeowner avoids a foreclosure auction and possible eviction from the home. However, financial literacy would tell one that if a lender will accept a reduced pay-off for a loan balance through a sale, then why not short refinance the home for the reduced/short sale amount? The affects are the same as a loan modification with the exception of the creation of a new loan made based on a realistic and “corrected” property value. In addition, the homeowner is refinanced into an affordable home with an affordable mortgage.

When mortgage loans are made, the company/bank that lends the money, pools the mortgage with other mortgage loans of similar terms, interest rates and risks. These pools are securitized (in short – packaged in a various dollar denominations and given an investment grade and interest rate) and sold on the bond market. US mortgage backed bonds are popular investment instruments and are purchased around the world by individuals and other countries’ governments as relatively safe investment…until two years ago.

So going back to mortgage loan modifications…when these investors get notice requesting permission to reduce a mortgage loan payment through a loan modification, the notice is essentially saying, would you, the investor, mind reducing your income from a bond and decreasing your investment portfolio substantially? The negative response by many of these bond holders/investors are causing many loan modifications to face rejection and a return to a foreclosure status after homeowners and loan servicers alike believe the loan is modified. Many housing finance experts think these investor actions will cause another flood of foreclosures over the next six months. Coincidently, if the homes go to foreclosure, the likelihood these investors will lose most of their investment is high. US Senator Durbin (D) has been arguing the defeat of the bankruptcy reform that allowed bankruptcy judges the ability to re-write mortgages of petitioners (someone filing bankruptcy) is the necessary teeth needed to motivate banks and investors to modify the very mortgage loans that caused the current economic depression.