Government plan to keep borrowers in their homes

Details of the government’s plan are not yet ready, but there is already plenty of chatter in the nation’s capital about how it might work. Here are some questions and answers about the plan that’s coming together. Q: How might the government’s plan work? A: The plan is likely to feature hefty incentive payments designed to encourage the lending industry to lower mortgage rates or reduce the total principal amount owed by borrowers, a Democratic Senate aide briefed on the plan said Friday. The idea is believed to be attractive because it is expected to be far less expensive than having the government buy up troubled loans, which are often combined and divided into mortgage-linked securities that are owned by investors. It was unclear, however, whether those government subsidies would be paid up front to companies that collect mortgage payments, or whether they would stretch out over several years. Those companies, known as loan servicers, have been roundly criticized for not being equipped for a massive surge in defaults and foreclosures. Q: I’m paying my mortgage on time. Will I get help? A: The plan is expected to help some borrowers who are not yet in default, though it’s not clear how many. Mortgage companies are likely to analyze the level of debt held by borrowers for signs of financial strain. Based on those criteria, borrowers could get a lower interest rate, or possibly a lower principal amount. Q: What are some of the pitfalls? A: Directly subsidizing mortgage rates could be difficult because most delinquent loans are tied up in mortgage-linked securities, and it’s unclear how long the subsidized payments would last, or how they would affect the value of those investments. Also, designing an accurate test of who will be eligible is likely to pose problems because borrowers may be able to find ways to game the system in an effort to qualify.