New rule affects homeowners in foreclosure avoidance program

The new procedure, to be adopted by servicer's by June 1, would require three documents upfront: a formal application including a description of the hardship created by the mortgage; proof of income, which would mean at least two pay stubs or the most recent profit and loss statement for self-employed borrowers; and a form authorizing the IRS to release tax data to the servicer.

If a borrower makes three payments at the modified rate, the modification will automatically be made permanent. The changes should help borrowers better understand the process and their chance of getting a loan modified.

Lenders are being encouraged to cut loan balances to avoid losing even more money on foreclosures. The government should use its control of Fannie Mae and Freddie Mac to start writing down the principle on mortgages owned or insured by them and also request, that the private sector do the same.

The program was designed to provide billions of dollars in subsidies to encourage lenders to forestall foreclosures by reducing mortgage payments to 31% of the borrowers household income.

To obtain the subsidies, servicer's must take a series of steps to reach an affordable payment: reduce the interest rate, extend the loans term to 40 years and suspend payments on part of the amount owed. A permanent reduction of the loan balance is optional.

If the loan owner comes out ahead with a modification, the servicer is required to make it. By documenting the borrowers financial situation before offering a trial modification, servicers can make this calculation upfront and inform borrowers whether they qualify