Today President Bush and his staff revealed the government’s new plan to stop foreclosures from rising. The most shocking part of the plan was that no monies will come from the government to bail out homeowners. The primary focus was going to be forcing Fannie Mae and Freddie Mac to do aggressive loan modifications.

The idea goes like this: borrowers must be 90 days or more behind in payments and cannot be going thru bankruptcy procedures. The goal is to reduce the interest rate on the loans and extend out the terms to get the monthly mortgage payment down to about 40% of the monthly household income. The plan means to act quickly to get the lower payments started quickly.

However, the plan will not reduce loan balances. This is a major point to pay attention to because many experts say that borrowers who are upside-down will simply walk away instead of reducing the interest rate. Fannie and Freddie portfolio or guarantee more than $5 trillion in mortgages. If more home owners start to walk, the market could get more disastrous than it is already.

Bush and his advisors said that although they are not forcing lenders to join in, they are hoping that they will see the benefits of doing so and keep borrowers in their homes. Citigroup already announced their plan. Bank of America and JP Morgan have as well. The only question that remains is will this program actually work?

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