‘Underwater’ borrowers could get relief under Obama plan

The Obama administration unveiled new measures Friday aimed at getting lenders to reduce the principal balances on problem mortgages and to refinance “underwater” borrowers, who owe more than their homes are worth, into government-sponsored loans.

The initiatives are part of an escalating effort to buoy the housing market -- and an acknowledgment that more steps are needed to prevent a fresh wave of foreclosures.

One provision will allow many unemployed homeowners to get three to six months of reduced mortgage payments while they look for a job.

But the most significant change to the $75-billion program is aimed at helping underwater borrowers. It would do this by encouraging banks to reduce the principal on loans in default, and by refinancing troubled loans into Federal Housing Administration-backed mortgages.

The change could help borrowers such as Hector Antonio Gomez and Sandra Segovia of Los Angeles. They were among the relatively small group of homeowners to get a permanent reduction in payments under the administration’s current program.

The Salvadoran natives avoided foreclosure and now have monthly payments they can afford but are still saddled with big debts. They owe about $460,000 on a two-bedroom bungalow in the downtown-area Westlake neighborhood. The home is assessed at $350,000 but probably wouldn’t fetch more than $286,000, according to a real estate industry estimate.

“We will never be able to pay that,” Gomez said in Spanish as he stood in his tiny tomato garden. Like many first-time buyers who purchased during the bubble years, the couple figured that home values would keep going up.

With the changes announced Friday, the administration hopes its Home Affordable Modification Program will meet its target of helping 3 million to 4 million homeowners avoid foreclosure through 2012.

To date, just 170,000 people have gotten permanently lowered mortgage payments under the year-old program -- which barely puts a dent in the projected 10 million to 20 million foreclosures expected in the next three years.

“It’s really important to recognize we’re not going to stop every foreclosure,” said Diana Farrell, deputy director of the White House’s National Economic Council. “It wouldn’t be fair, it would be too expensive and we probably wouldn’t succeed, in any case, because many people got into homes that they simply cannot afford.”

Slashing the principal on underwater mortgages is seen by many experts as a key to helping borrowers stay in their homes, but the administration has resisted such a move, saying it could encourage some borrowers to fall behind on their mortgages intentionally -- and stick taxpayers with the bill.

But under greater pressure from the government, and with more foreclosures looming, lenders are warming to the idea.

On Wednesday, Bank of America Corp. said it would offer to erase as much as $3 billion in principal owed by thousands of severely delinquent borrowers.

“There have been growing pains in that program. I think that we all think that we could have certainly done better,” Assistant Treasury Secretary Michael Barr said of the Obama administration program. “And as the crisis unfolded, we wanted to be mindful of the need to adjust the program along the way.”

Still, the new incentives just “tinker around the edges” of the problem, said John Taylor, president of the National Community Reinvestment Coalition. Taylor is concerned that the new incentives won’t be strong enough to get mortgage servicers and investors to modify loan terms.

Others say the administration is going too far and is rewarding people who made bad financial decisions or bet that housing prices would keep soaring.

Rep. Jeb Hensarling (R-Texas) said Friday that the administration’s program had been nothing short of “an abject failure” and that the decision to expand it by providing incentives for write-downs was troubling.

“This is another bank bailout that will reward irresponsible borrowers and lenders,” Hensarling said. “Home buyers are taxpayers too, and there is nothing about these efforts that is taxpayer friendly.”

Gomez and Segovia said they just wanted a home for themselves and three daughters.

They bought their 86-year-old, 952-square-foot home in July 2007, just as Southern California home prices were peaking, slapping down $23,500 as a down payment, paying closing costs and taking out two loans for the remaining $446,500.

The terms of the two loans were precarious, and typical of the kind of predatory lending that helped inflate the housing bubble.

The first mortgage carried an initial 6.5% interest rate but was scheduled to adjust after five years. Gomez and Segovia were granted a permanent modification in January. The second loan was a 15-year loan with a 10.5% interest rate.

“As we never had bought a house, we did not know this was high,” Gomez said.

The couple was able to make the combined payments of $2,665 until last March when Segovia lost her job as a baby sitter and Gomez began losing hours at his job as an electrician. They dug into their savings and twice applied for a loan modification. Still, they fell behind on their payments and began receiving threats of foreclosure.

The nonprofit Los Angeles Neighborhood Housing Services helped them get their loans adjusted permanently earlier this year, but they would still like to see their principal reduced.

“That would be magnificent,” Gomez said.

alejandro.lazo

@latimes.com

jim.puzzanghera

@latimes.com