The Obama administration announced plans last week to enhance the Home Affordable Modification Program (HAMP), so that more assistance will be given to unemployed borrowers, unable to get assistance from lenders under HAMP as it now exists.

Under the new plan, lenders would be required to reduce monthly mortgage payments to 32 percent or less of the borrower’s income, or suspend the mortgage if the borrower has no income. This assistance would be for a six-month period. After this period, if the borrower still has a problem he or she will be evaluated for a loan modification. It is not clear, however, if borrowers will be required to pay the interest on the loan during the six months forbearance period.

Lenders and mortgage brokers contacted said they had not reviewed the regulations sufficiently to comment on move, but believe that this would be a great help to borrowers who continue to struggle with payments.

Last year, the federal government introduced HAMP, a $75 billion program geared to helping some three to four million Americans to stay in their home. The program called for lenders to reduce monthly payments (by adjusting interest and loan terms) up to 31 percent of the borrower’s pre-tax income. However, despite the flood of loan modification applications, only 170,000 borrowers have been able to get their mortgage payments modified.

A representative of Wells Fargo, who asked not to be identified, said the main reason for the lag in modification is that the risks of the lenders will be enhanced by modifying loans to borrowers who are unemployed and unsure of future employment.

The low number of approved loan modifications prompted consumer advocates to label the HAMP a failure.

The new plan will provide more assurance and comfort levels to lenders, especially those who have been reluctant to reduce mortgage balances. The government will double the incentive to servicers to complete a HAMP modification to $2,000 and provide more funds to second-lien holders to release borrowers from that debt.

The possibility of loan reduction will be available to eligible borrowers who owe more than 115 percent of their home's current value. The balance would be forgiven as long as the homeowner remains current with payments for three years.

With nearly one in four homeowners in America delinquent with their mortgage payments, several experts believe that that the best way to solve the problem is to reduce the loan balances.

Although to date most banks have been reluctant to reduce the principal loan, Bank of America took the initiative last week when it announced it would lower the mortgage principal of a limited number of borrowers, if they remained current for five years.

The amended HAMP plan also assists borrowers who are current on their mortgages, but have seen their property values decline. These homeowners will be able to refinance under Federal Housing Administration (FHA) loans amounting to a maximum of 97.75 percent of their home's price.

Lynford Jarvis is hopeful that the new initiatives being taken by the government will really improve lenders’ cooperation, especially in making loan modifications permanent.

“I’ve been trying to get a loan modification, having lost my job, and the prospects for future employment look bleak as I am over 60. But, the bank told me that even if the loan is modified, it will be temporary. What is needed is for the loans to be permanently reduced so that the modified payment also becomes permanent.”

The new HAMP plan is to be paid for with funds from the Troubled Asset Relief Program (TARP).