Critics of the new loan cut program say that efforts by the government to reduce loan balances has been unsuccessful so far.

The program, which enables mortgage servicers to refinance loans for those who owe more on a property that it is worth—“underwater” loans—if the loan’s balance is reduced, hasn’t received very many applications, according to the FHA.

Some states have made similar efforts and have met with equally unsuccessful results. For example, both Arizona and California have allotted federal funds totaling $1 billion for a loan-reduction program that offers to match as much as $50,000 in principal reductions by banks.

These states have prohibited borrowers who chose to cash-out refinance from eligibility, and balances are not forgiven immediately.

In the face of these incentives, the program in Arizona has received less than 500 applications and has only cut one borrower’s loan balance since its inception in September.

Banks contend that a loan payment that is affordable is much more important than a smaller loan. So in Arizona, and similar states where nearly 33% of all mortgagors are underwater, temporary reductions in rate isn’t enough to keep mortgagors in their homes. Many mortgage servicers state that including principal reduction in a loan-modification program is essential to address the negative equity problem.

About two dozen mortgage servicers have enlisted in a new addition to the government’s loan-modification program that urges companies to reduce loan balance for certain mortgagors. As of yet, this results for the program have not been released.

Refinancing Your Mortgage

If you are behind on your mortgage and your payments are difficult to keep up with, you’re not alone: One in five homeowners now owes more money on their home that the house is worth, according to First American Core Logic. When it gets to this point, the goal here shouldn’t be to lock in the lowest interest rate; it should be to attempt to qualify for refinancing into a mortgage you can afford. Here are a couple options providing that you have a job and meet certain qualifications.

The first option is the Making Home Affordable program. This program was announced in March by the Obama administration and is intended for homeowners who owe more money on their home than the house is worth and need a more affordable payment. One feature of refinancing with the Making Home Affordable program is an interest rate that is fixed for at least five years.

The Making Home Affordable program is no cure-all. You’ll only qualify for the program if Fannie Mae or Freddie Mac owns the current loan on your home and the balance on your first mortgage can’t exceed the value of your home by more than five percent. That five percent limit disqualifies many in troubled markets in Arizona, California, Florida, and Nevada, where home values have dropped considerably. The Making Home Affordable program ends in June 2010.

The second option is called the Hope for Homeowners program. The Hope for Homeowners program may help if you’re at risk of default or are in bankruptcy or foreclosure. Because of the high cost to both the lenders and borrowers, very few of these FHA-insured loans have had any takers.

The Obama administration has proposed fixes to the Hope for Homeowners program to make it more effective. This includes the easing of eligibility requirements for borrowers and reducing their costs.

See more:
Obama’s Loan Modification Program
Fannie Mae, Freddie Mac, What to do?
www.makinghomeaffordable.gov
www.hud.gov/hopeforhomeowners