One of President Obama’s biggest challenges in fixing the economy is finding a way to help stem the tide of preventable foreclosures that are currently dragging down the battered housing market.

Through the Making Homes Affordable program, home owners and lenders were to work together to find way to modify existing mortgages to make the loans more affordable , usually resulting in a lower interest rate, even for homes that are under water.

The program got off to a sluggish start, with swamped lenders being slow to roll out trial modification programs for eligible borrowers. Lately, many more trial modifications have been offered to borrowers, which shows that the program can in fact work.

However, many of the trial modifications have not been made into permanent changes. In many instances, this is because once a trial modification is put in place, the borrower is required to provide additional documentation in support of the new payment.

The documents required to be submitted by the borrower – proof of income, bank statements, tax documents, etc. – is sometimes never been received by the mortgage servicer, filled out incorrectly, or lost/misplaced by either the borrower or the lender. This causes the trial modification to not only not become a permanent change, but, in many instances, causes monthly payments to return to pre-trial modification levels.

In an attempt to help solve the problem, the Treasury Department announced that borrowers who wish to enter into a trial modification must provide all required documentation UP FRONT.

Obviously, this will make getting a trial modification a little more difficult, but, will ultimately make getting a permanent modification a much more efficient and fool proof process.

And, if you think about it, this is exactly what should have been required from the beginning, especially when you consider that many of these problem loans were Alt-A, no documentation “liar loans.”

So, let’s hope this latest initiative will be a step in the right direction in getting the economy back on track.

Is it just me, or does it seem like every other commercial on the TV or radio is for some sort of debt relief or debt consolidation company?

I know things are very tough right now with the economy. Unemployment is at the highest levels since the early 1980s, it’s still very hard for small businesses and consumers to get access to credit, and the housing market – the single largest source of personal wealth in this country – will probably never rebound to its 2005/2006 peak.

But, are things so bad and were we collectively such terrible money managers that we need to be completely inundated with companies offering to help us settle our credit card debt for pennies on the dollar?

Considering much of our (fake) economic prosperity over the past 20 to 25 years has been fueled by debt spending – both by our government and by the general public – it makes sense that we’re in a world of hurt. After all, it’s easy to spend on debt when all you have to do is do a quick cash-out refinance of your always-increasing-in-value home.

But now that the refinance and home-equity loan spigot has been all but turned off thanks to rapidly falling home values – nearly one in four borrowers is underwater – we actually have to pay down our acquired debt with our savings – which, for a while, was either negative or right around zero percent.

Couple this with the fact that the number of Americans who filed for personal bankruptcy surged by almost 33% in 2009, it’s easy to see why there is such a demand for debt consolidation and credit counseling services. After all, we wouldn’t be surrounded by these advertisements if they were falling on deaf ears.

Hopefully The Great Recession has reminded us that frugality is good, make sure we live within our means, and save for a rainy day – or in this case a rainy two years.

What are your thoughts? Please leave your comments below.

Yesterday, President Obama met with the heads of many of the nation’s largest banks and investment firms in an attempt to push the banks to get more money flowing into the economy.

According to Obama, these banks and investment firms have an obligation to modify more mortgages and create more small business loans due to the fact tax-payers helped to keep the banks afloat during the height of the financial crisis.

I agree with Obama that these banks – many of whom are handing out record bonuses and reporting massive profits after received TARP funds – have an obligation to help rebuild the economy by being more receptive to mortgage modification and lending to small business. However, I can’t help but think back to one of the main reasons we got in this financial crisis in the first place – it was too easy to get loans.

While I don’t think Obama is asking the banks to blindly make new loans or modify existing ones for anybody with a pulse, I can certainly see why many of these firms continue to be tight with their capital.

With unemployment continuing to climb, there is bound to be even more defaults over the coming months, which will obviously hurt these banks’ balance sheets. If they’ve over extended themselves by making too many new loans, we could see ourselves facing another financial crisis and TARP round two situation.

Recessions brought upon by deleveraging – which this one most certainly is – tend to be much longer and more severe in nature than usual “business cycle recessions.” So, while I think Obama’s intentions are in the right place, it is entirely possible that the best long term solution for this financial crisis and recession is to continue to let lending be tight, let the bad loans get flushed out of the system, and then return to stable investment driven (not debt fueled) growth a few years down the road.

The other day I was reading an interesting article by Liz Pulliam Weston on MSN Money in which she talks about whether or not “underwater” homeowners should simply walk away from their mortgage.

For those of you who have never heard the term “underwater” used in housing, basically it means that a homeowner owes more money on their mortgage than their house or property is worth. For example, if you owe $250,000 on your mortgage but your home is worth only $200,000, you would be “underwater” by $50,000.

Considering how far and how fast real estate prices have fallen in the past three years, it’s easy to see why so many home owners with a mortgage – nearly 25% according to a recent poll – are in a situation like the one described above.

In Weston’s article, she references a paper written by University of Arizona Law professor Brent T. White in which he asserts that if you’re underwater, you should walk away from the home and mortgage, even if you are able to make the monthly payments.

White argues that underwater borrowers would be better off financially over the long-term, not to mention the fact that the current system isn’t exactly set up to provide much help to those who need it.

White also asserts that the morality regarding walking away from a home and mortgage shouldn’t be taken into consideration as this is purely a financial decision.

Weston, on the other hand, argues to not walk away from your obligations, and to try everything possible to make your payments.

She states that aside from the fact most of us believe we have a moral obligation to continue making payments, letting your home slip into foreclosure will ruin your credit score, and will continue to foster the downward spiral in the real estate market that our country is trying so hard to pull out of.

Weston ends her article by recommending that troubled borrowers attempt to work with their lenders and considering all options prior to deciding to simply walk away.

So, in which camp do you fall? Should underwater borrowers walk away from their home and mortgage because it’s better for them financially, or do they have a moral obligation to stick it out regardless of the financial impact? Let me know what you think by leaving a comment below!