In a classic case of “too little, too late”, the U.S. Senate voted to ban “liar loans” as part of the financial regulatory reform bill and require lenders to fully document a borrower’s income before approving a loan.

From a CNNMoney report:

This would effectively end the origination of no-doc or stated-income mortgages, which many call “liar loans” because borrowers did not have to prove their income. Housing experts point to these mortgages as one catalyst for the housing collapse.

The bill would also prohibit lenders from giving brokers incentives for steering customers to loans with higher interest rates or prepayment penalties.

“Deceptive mortgage practices like hidden steering payments directly led to the Wall Street meltdown and resulted in millions of families losing their homes,” said Sen. Jeff Merkley, D-Ore., co-author of the bill.

The provisions build on Federal Reserve regulations that required lenders to verify the income and assets of subprime borrowers. Those rules, which went into effect in October, did not ban incentive payments, called yield-spread premiums.

“This should make the mortgage market a safer place for consumers,” said Julia Gordon, senior policy council for the Center for Responsible Lending.

A report on Bloomberg.com recently said that the Obama administration was considering a ban on all foreclosures unless they have been reviewed and rejected by the Home Affordable Modification Program (HAMP):

The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.

“It is one of the many ideas under consideration in the administration’s ongoing housing stabilization efforts,” Treasury spokeswoman Meg Reilly said in an e-mail. “This proposal has not been approved and there are no immediate planned announcements on the issue.”

She confirmed the authenticity of the document, which hasn’t been made public.

At present, lenders can initiate foreclosure proceedings on any loan that hasn’t been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification.

The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan.

The article noted that the HAMP program covers 89% of outstanding residential mortgages.

CitiMortgage has launched a pilot program that will allow distressed mortgage holders to stay in their home an additional six months in return for turning the keys over to the mortgage lending giant at the end of that period.

In a press release issued last week, CitiMortgage announced that the program will initially be offered in six states: Texas, Florida, Illinois, Michigan, New Jersey and Ohio:

In exchange for the deed on their property, CitiMortgage will allow borrowers to stay in their homes for a period of up to six months. At the end of the six months, the borrower will turn over the property deed to CitiMortgage, and CitiMortgage will provide a minimum of $1,000 in relocation assistance to the borrowers. Citi will also provide relocation counseling by trained professionals and will cover certain monthly property expenses if Citi determines that the borrower can no longer afford them. Payment of utilities costs will be the responsibility of the borrower. Other costs incurred by the borrower, such as homeowner’s association and escrow fees, will be determined on a case-by-case basis considering the borrower’s specific financial circumstances. As part of the agreement, borrowers must maintain the property in its current condition and agree to bi-monthly meetings during which trained relocation professionals will help the borrower prepare for the next chapter of their lives.

Before a borrower enters the Foreclosure Alternatives Program, they must first be evaluated for a permanent mortgage modification. For those who do not qualify for a modification or another solution, CitiMortgage will explore the possibility of a short sale in which the company might accept a buyer’s offer for less than the outstanding amount of the mortgage. If a short sale is not feasible, then the borrower may be considered for the deed-in-lieu program. In addition, in order to be eligible, homeowners must hold first mortgages with a clear title owned by CitiMortgage, occupy the property, and be at least 90 days delinquent on their mortgage payments.

As it evaluates the progress of the pilot program, CitiMortgage will assess whether or not to expand the program to other parts of the United States. The initial pilot is expected to help as many as 1,000 families.

The government continues to struggle to put together a loan modification program that will work for both the homeowner and the lender. According to a recent announcement by HUD and the U.S. Department of the Treasury, new provisions to the mortgage modification program (HAMP-Home Affordable Modification Program) that will speed the process will go into effect on June 1, 2010 and include:

Documentation – homeowners must supply three types: a Request for Modification and Affidavit form, IRS Form 4506T-EZ and proof of income.

Acknowledgement – lenders must acknowledge in writing within 10 days that they have received the documentation and provide a timeline and explanation of the evaluation process.

Evaluation – lenders must evaluate application within 30 days and request any additional information needed from the homeowner within that timeframe. Also within that same 30 days, lenders must provide homeowners who meet modification eligibility requirements with a trial modification plan notice. If the homeowner does not qualify, they must also be notified within 30 days and be given consideration for other options, including forbearance, refinancing, non-HAMP modifications, short sales or deeds in lieu of foreclosure.

Homeowners who obtain a trial modification must make payments on time for the modification to become permanent.

And when they say “permanent”, it’s the government definition: the lender can choose to continue or end the modification at any time, even years later.