The new rule may open up liberal repayment provisions to borrowers, but seems to deviate from the long-standing norms favorable to less-fortunate borrowers. What are the proposed new rules?

New restrictions are likely to be imposed on lenders – first of all the lenders are held responsible to see that mortgage loans are affordable to the buyer. There will be two divisions – “qualified” and “not qualified”  mortgage loans ultimately by this. Another restriction is lenders must retain at least 5 percent of the credit risk while issuing new loans.

Mortgage lenders are safe with low-risk category loans that is – those with terms no longer than 30 years; fully amortizing payments which is possible for borrowers with sound financial background credit-score-wise; and qualification criteria based on the highest possible interest rate in the first five years etc. In respect of these qualified mortgages, the lender is not obliged to keep the above credit risk charges.

The above stipulations are hard to qualify, for those borrowers emerging from low-income, minority groups and underserved communities of the society. Lenders if obligated by the proposed law, to see that these unqualified borrowers are served to the best possible extent, invariably there will be price differences, between the qualified and not-qualified sections of borrowers – and the difference in cost will only fall on the heads of these poor cousins of the home loan borrowers.

Talking of qualification, a borrower with 800 credit score and 40 percent equity was easily qualified, irrespective of proof of income, prior to the sliding down of mortgage industry. Lenders were safe in their extending capital at least by the equity, if not the credit score. Now with importance shifting to not-qualified section of borrowers, the lenders will not be interested and the home loan issuance will shift to mega lenders with hefty charges, to do business under the changed conditions.

Surely this is not the intended effect of the proposed reform bill, but that is what going to happen.

Looking back in the history –  a deduction for mortgage interest was started to be allowed, when Congress established the modern income tax in 1913. According to the Congressional Research Service, during those days only few Americans owned homes and it was not envisioned that this concession will spur homeownership as of today. As per Joint Committee on Taxation statistics, nearly 37 million American tax filers now use the mortgage interest deduction.

Analysing the statistics provided – this subsidy is being utilized highest in states where housing costs are more – such as California and Hawaii, and being used widely in Texas also. According to Tax Foundation figures in Texas, the average deduction for tax filers claiming the break was $9,955 during the year 2008.

Actually not all home buyers can claim this concession, because the value of the tax break is tied to how much debt one takes on. The tax deduction is not enough to make a difference to their taxes for people buying lower-cost homes and they can use the standard deduction allowed. Renters cannot avail this subsidy. This benefit is mostly applicable for those who buy higher-priced homes – ironically.

According to data compiled by the National Association of Homebuilders, older couples when they pay tax are not the ones to benefit most from this deduction and the average mortgage deduction is recorded highest for home owners in the age group between 35 and 45.

For example in Texas, the average mortgage interest deduction is highest for those earning more than $200,000 – according to Internal Revenue Service data. For those earning less than $50,000 – the average deduction is less by $7,900 to $10,300 than those earning $200,000.

It is reported that proposals are under way in 2011 budget to limit the mortgage interest deduction for families with incomes over $250,000. The National Association of Realtors said the change could trigger yet another crisis in home values, even as we struggle to recover from the first.

According to the report, up to 75 percent of loan modifications processed through the Home Affordable Modification Program (HAMP) which are not backed by the federal government will end up defaulting.

Experts say the reason for this high number is that the loan modification process does nothing to help them combat their debt issues, which is their main problem.

Most of these homeowners are still saddled with abnormally high amounts of debt, including loan payments and high interest credit cards. The loan modifications enable them to reduce mortgage payment down to about 31 percent of their overall income level, but this has no effect on other debts that the families may have already acquired.

In most cases, the average family that has had their mortgage modified via HAMP has more than half of their monthly income, before taxes, already spent before they even get a chance to buy groceries. They live paycheck to paycheck, and when emergency expenses arise, like an unexpected automobile repair, they are going to have extreme difficulty paying for it.

According to the chief economist for the Mortgage Bankers Association, this information does not come as a surprise. Historically they have found that old borrower behavior returns, and that mortgage defaults in the 40 to 60 percent range are the norm when dealing with loan modifications.

When a homeowner defaults for a second time, lenders often seek out foreclosure alternatives, rather than trying to go through the loan modification process again.

About 50 percent of homebuyers that end up losing their homes will do so through foreclosure. The remaining 50 percent will use the short sale route, where they sell their home for less than what they owe the bank, or using the deed-in-lieu process, where they simply forfeit their property to the bank in exchange for them forgiving them the outstanding loan balance.

The Treasury Department has been encouraging lenders to consider short sale options, and even offer cash incentives to people that agree to short sales through their Home Affordable Foreclosure Alternatives program (HAFA). If a homeowner does re-default on their HAMP modified loan, banks will often help them to proceed with the short sale or deed-in-lieu process.

Short sales can be beneficial to debt-ridden homeowners, since it allows them to carry on with their lives more quickly. It allows them to immediately move to more affordable housing and begin rebuilding their credit scores.

Citing February statistics, the report says over 50 percent of an estimated 170,000 distressed borrower-home owners are seriously “underwater” by having negative equity of at least 25 percent – meaning for every $1.00 of home value, they owe on mortgage $1.25.

According to the report of the Congressional Oversight Panel, a watch-dog committee on federal bailout plans, released in April – the average troubled home owner that has received a five year modified mortgage had a negative equity of 35 percent, prior to the foreclosure mitigation program. It adds further that after the loan modifications, the average home owner’s burden has actually increased and they are underwater now by more than 43 percent.

Already conducted research surveys have shown that the more underwater home owners are, they are more likely to – fall behind on mortgage repayments; default or simply walk away from their sinking properties.

The government auditors’  report contradicts the COP report saying it understates the problem. The figures given by COP are for first-lien home mortgages only and debt owed on junior liens, such as second liens and home equity liens, is not part of that calculation. Last April, the Obama administration estimated that “up to 50 percent of at-risk mortgages currently have second liens.”

The auditors’ report indicates that – if junior liens were to be included, the percentage of negative equity holders would be higher significantly. In the words of government auditors “The continuing deep level of negative equity for many HAMP permanent modification recipients makes the modifications’ sustainability questionable; even with more affordable payments, deeply underwater borrowers may remain tempted to strategically default or may be compelled to, because core life events, such as death, divorce, disability, marriage, child birth, job loss, or job opportunities necessitate a move.”

In a round-about way, the government auditors say in their report in so many words that troubled home owners, even after availing loan modifications, tend to fail and more delinquencies can be expected in the future.

It is really a daunting experience for a home owner to desert it – after living there for years happily and enjoying the fruit of his or her savings and investment in life to acquire that property. Sorrows and joys, ups and downs, child birth and death of kin all would have happened while in residing there, as the proud owner of the premises called “Home”. Invariably the attachment one has with the own-house needs no elaboration.

The foreclosure crisis, where home owners used financial assistance from mortgage lenders and become suddenly unable to meet their repayment commitments, are uprooting millions of home owners and pushes them to this brink of desertion of their beloved homes. When the property value becomes less than what is owed on mortgage of that property, it is said to be “underwater” – tersely meaning that the flood is running above their heads and make them sink.

Trulia.com and Realtytrac jointly conducted a latest survey among these “underwater” distressed home owners. In the given situation of their inability to meet the mortgage, even by selling the home – known as negative equity – 41 percent of those polled the online survey said they would walk away from their homes, while the majority are not yet ready to leave their homes.

Walking away would be the first choice of only 1 percent of the survey participants while 69 percent of them said they would attempt alternative ways, including refinancing first.

Peter Flint, CEO of Trulia.com says the Home Affordable Modification Program announced by the federal government has not had the desired effect on the problem, since for every borrower who avoided foreclosure through HAMP plan last year, another 10 families lost their homes, showing that the government programs will never reach the overwhelming majority of troubled home owners.

In the coming years, millions of American families are likely to lose their homes, once their mortgages adjust. The backlog is really huge, despite the federal government’s foreclosure mitigation plans. The HAMP and HAFA programs are yet to bear fruit, even after allocating $75 billion of tax-payers’ money.

Nearly 231,000 distressed home owners were benefited by the loan modification plan, in securing permanent modification to their monthly mortgage bill. But this is just 20 percent of the total sufferers – 1.2 millions of people who started the program over the last year. Lending banks are somewhat reluctant for loan modification, but even if they are ready to do so, there are still hundreds of thousands of borrowers, who do not qualify under the stipulated conditions or default once again even after loan restructuring.

The main catalysts pushing the foreclosure crisis into deep trouble are – raising unemployment rates and reduced income to the families or household this year.  One more surprising fact is that although avoidable laxity in issuing home loans started defaults initially, borrowers with good credit record, who took conventional mortgages at fixed interest rates, are the fastest growing segment of foreclosures.

As of March this year, nearly 7.4 million mortgage borrowers, representing 12 percent of US households with a mortgage were stated to have missed at least one month of payment or in foreclosure already – according to Lender Processing Services Inc.

The statistics for April 2010 are encouraging though. Nearly 334,000 US households reported new foreclosure filings in April, one in every 387 housing units, which is a decrease of more than 9 percent from March and lesser by 2 percent compared to April 2009, and a record decline for the first time in 5 years.

Nevada continued to head the Top 10 list of States hard-hit by foreclosure rates – one in every 69 housing units receiving a foreclosure filing – followed by Arizona, Florida, California and Michigan, in that order.

President Obama made his first address on the subject and drew laughter and smiles on the faces of the Senators, by saying that he knew the Wall Street would not relish this idea of paying back the tax payer; but when they can afford paying big bonuses to their shareholders and employees, they can very well afford to pay a modest fee to the US tax payers, who were responsible for this present state of affairs, by rescuing them during dark times.

Obama also agreed that the Bank bailout effort of the government is not welcomed by the public, but said it was a necessary step, for the purpose of saving the US economy from falling deep down further.

He recalled the time he took over office, when it was an urgent task to bail out the same banks – which were the root cause of bringing the housing crisis – by the government intervention. It was not an easy task, but it had to be undertaken. He knew that the bank bailout was one thing that unified both Democrats and the Republicans to oppose. Everyone including him hated it but there was no escape.

Obama reminded the House that when he ran for president, he had promised that he would not just do what was popular but what was necessary.  If the financial system had been allowed to melt down the results would have been devastating – doubling the unemployment figure; closing of more businesses and losing more and more homes to the foreclosure crisis.

The President announced that an amount of $30 billion drawn from the larger banks would be used towards helping the smaller ones.

So Obama is destined to make more speeches and win more applause and standing ovations from the Treasury benches at least.