Borrowers who need to have their loans modified to make them affordable do best if they qualify for one under Making Home Affordable(MHA) -- the Federal Government’s new assistance program. See The Administration’s Plan to Help Troubled Borrowers.

A major advantage of obtaining a modification under MHA is that borrowers don’t have to be in default to qualify. They need only be financially over-burdened, as defined below. In addition, a borrower receiving a modification who stays current on the modified loan will receive $1,000 a year from the Government in the form of balance reductions, for up to 5 years.

To qualify, borrowers must occupy the property as their primary residence, have a first mortgage of no more than $729,750 (the maximum is higher on 2, 3 and 4-family houses), and have housing expenses that exceed 31% of gross before-tax income.

Housing expenses consist of the mortgage payment of principal and interest, property taxes, homeowner insurance, flood insurance, association or condominium fees, but not mortgage insurance. The borrower must be able to document expenses and income, and to sign Treasury form 4506 which authorizes the servicer to request a copy of the borrower’s tax return. Eligibility is not affected by the property value, or by having a second mortgage.

"Borrowers must also represent and warrant that they do not have sufficient liquid assets to make their monthly mortgage payments". Exactly what constitutes a "liquid asset", or how much can be held without becoming ineligible, is not stated. I would define a "liquid asset" as deposits and money market funds. My definition of "sufficient" liquid assets is an amount that would cover the payment for 3 years or longer.

Contracts of eligible borrowers are modified under MHA to reduce the expense ratio to 31%. This is done primarily through temporary interest rate reductions, following procedures detailed by the Government.

In most cases, borrowers who apply for a modification and who are eligible under the MHA program, will be modified under that program. Servicers have special financial incentives to place eligible borrowers in the program. The Government compensates the servicer as well as the borrower. Nevertheless, it is useful for borrowers to make their own determination, because servicers are over-burdened and sometimes make mistakes.

Note: If you are still not sure of your MHA eligibility, you can check www.makinghomeaffordable.gov. Also, FICO has a program for determining eligibility that you can try. See http://www.mortgagereliefonline.com/.