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U.S. to Expand Aid to Troubled Homeowners

Source: NY Times

Posted on 26 Mar 2010

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The Obama administration on Friday announced broad new initiatives to help troubled homeowners, potentially refinancing millions of them into fresh government-backed mortgages with lower payments.

Another element of the program is meant to temporarily reduce the payments of borrowers who are unemployed. Additionally, the government will encourage lenders to write down the value of loans held by borrowers in modification programs to make their mortgages more affordable.

The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.

At a White House briefing, officials emphasized that no new taxpayer money would be used for the programs. Instead, funds to provide incentives for loan servicers to participate would be drawn from the $50 billion allotted to housing in the Troubled Asset Relief Program.

Officials said they expected the new initiatives, combined with the government’s existing programs, to help three to four million distressed homeowners over the next few years.

In its statement, the Treasury said the initiatives were intended to “balance the need to help responsible homeowners struggling to stay in their homes, with the recognition that we cannot and should not help everyone.”

The early reaction to the program among housing groups was largely positive.

“Today is an important step forward for homeowners, who will now have more options to retain homeownership,” said Faith Schwartz, executive director of HOPE NOW, an industry-created alliance of mortgage servicers, investors, counselors and other mortgage market participants.

The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.

About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.

Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.

The success of the F.H.A. element will depend on the willingness of investors to participate. If investors believe that a homeowner will continue to pay, they may choose not to take the loss. That could set up a battle between borrowers and investors.

John Taylor, president of the National Community Reinvestment Coalition, said he was skeptical the program would work in large numbers. “I will be pleasantly shocked if investors step up for half a million borrowers,” he said. “The real acceleration in the number of foreclosures prevented will come with mandatory principal write-downs.”

If successful, however, the plan could pose a different type of problem: it could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.

The F.H.A. has already expanded its mortgage-guarantee program substantially in the last three years as the housing crisis deepened. It now insures more than six million borrowers, many of whom made minimal down payments and are now underwater.

The agency will use $14 billion of the Troubled Asset Relief Program funds for the refinance program, some of which it will dangle in front of financial institutions as incentives to participate. The government is not planning to solicit loans from investors for the program, stressing that it is voluntary.

Another major initiative announced Friday would encourage lenders to write down the value of loans for borrowers in modification programs. Until now, the government’s modification efforts have focused on lowering interest rates. The write-downs would take several years to become fully effective.

Lenders began offering principal forgiveness last year on loans they held in their own portfolios. In the fourth quarter, however, this process abruptly reversed itself, for reasons that are unclear. The number of modifications that included principal reduction fell by half.

Bank of America, the country’s biggest bank, announced this week that it would forgive principal balances over a period of years on an initial 45,000 troubled loans. A third element of the White House’s housing program will require lenders to offer unemployed borrowers a significant reduction in their payments for a minimum of three months. Borrowers will have to be receiving unemployment assistance to qualify.

The new initiatives will expand the government’s current mortgage modification plan, announced a year ago with great fanfare. It has resulted in fewer than 200,000 people getting permanent new loans. As many as seven million borrowers are seriously delinquent on their loans and at risk of foreclosure.

While fewer people are beginning default, the number of borrowers who are seriously distressed is rising. In the fourth quarter, the number of households at least 90 days past due on their mortgages swelled by 270,000, according to a report issued Thursday by the comptroller of the currency and the Office of Thrift Supervision.

“The government is seeking to persuade people to stay in their homes by aligning the mortgage debt with the asset value, which is the only viable path to real housing stability,” said one person who was briefed on the government’s plans.

The number of foreclosures in the fourth quarter rose 9 percent, to 128,859. An additional 38,000 owners disposed of their homes in short sales, where the lender agreed to accept less than it was owed.