U.S. expanding plan to stem foreclosures
The Obama administration, stepping up efforts to stem foreclosures, will offer lenders and homeowners incentives to cut payments on second mortgages, write down balances on first mortgages that are underwater, and repay loans in a timely fashion.
The new measures announced Tuesday would especially help many distressed homeowners who have both first and second mortgages -- and can’t afford either. The Treasury Department now wants lenders and their customer-service agents to agree to modify both loans as part of a comprehensive solution.
“Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall,” Treasury Secretary Timothy F. Geithner said.
The program would slash second-mortgage interest rates to as low as 1% for five years for some borrowers. It also seeks to revive a Federal Housing Administration effort to persuade lenders to cut loan balances enough so that borrowers again have equity in their homes.
Money for the plan would come from a previously authorized $50-billion allocation from the $700-billion Treasury Department bailout fund that Congress established last year. The $50 billion already has been used to create incentives for modifying first mortgages.
During the real estate boom, many borrowers used second mortgages to cover part or all of their down payment. Amid the housing frenzy, these so-called piggyback loans were granted to people who had poor credit or who weren’t required to verify their incomes and assets.
Government officials said about half of all troubled first mortgages have second mortgages attached.
The government plan would provide cash incentives to both loan officers and borrowers for successful second-mortgage modifications. A loan officer would receive $500 upfront, plus $250 a year for up to three years as long as the loan remains current.
Borrowers who make payments on time will receive $250 a year for as many as five years.
The plan also would allow lenders the option of asking the government to buy second loans at pennies on the dollar, eliminating homeowners’ obligations. But Treasury officials said they expected rate adjustments to be a much more popular option.
Treasury officials said a number of major banks had indicated that they intended to participate in the program to modify second mortgages. The original loan modification program for primary mortgages was announced in February.
Given new life with Tuesday’s announcement was the FHA’s Hope for Homeowners program, which allows borrowers who are underwater -- owing more than their homes are worth -- to reduce their loan balances. The idea was to restore their equity to provide them an incentive to keep making payments, something it was hoped lenders would go along with as an alternative to foreclosures.
Although lenders have been willing to cut loan payments by reducing interest rates, they have been mostly unwilling to reduce the amount owed. In the end, the FHA plan proved unpopular with both borrowers and lenders because restrictions made the aid financially unattractive to them.
The Hope for Homeowners program is now being pulled under the umbrella of Obama’s housing program with financial incentives for servicers to modify loans, giving Housing and Urban Development officials new hope for the plan.
Loan officers trying to renegotiate an interest rate for borrowers through the government program will be required to evaluate whether homeowners are eligible for a write-down on the amount owed through Hope for Homeowners.
If the borrower is eligible and the lender is open to the possibility, Hope for Homeowners must be offered, Obama’s plan dictates.
Edward Morrison, a Columbia University law professor, saw the program as a bit of a gamble for lenders and loan officers.
“But Obama seems to be wanting to force servicers to take Hope for Homeowners seriously,” he said.
The initiative has been especially important in California and other Sunbelt and Western states, where the housing boom sent prices to their highest levels -- and now to their steepest declines.
Stretching to buy homes, Californians received more than their share of second mortgages, and a large percentage now find they owe far more than their homes are worth. That made them ineligible for Obama’s earlier plan to help borrowers refinance loans owned or guaranteed by Fannie Mae or Freddie Mac, the huge government-controlled mortgage companies.
Until now, the most that could be refinanced was 105% of the value of the house. If the new federal provisions prove workable, borrowers who are underwater by more than the prior limit may be eligible for help under the FHA’s program.
California Assemblyman Ted Lieu (D-Torrance), who had criticized Obama’s Making Home Affordable program for leaving out too many troubled borrowers, praised the new approach. He said it made sense to offer financial incentives to motivate lenders to write down loan balances and modify second mortgages.
Under the original Making Home Affordable program, Lieu said, a borrower with a $120,000 mortgage on a home now worth $100,000 would not qualify for refinancing because the debt is 120% of the home’s value, above the 105% limit.
“However, under the Hope for Homeowners program, the homeowner could qualify and the new refinanced loan would be $96,500,” Lieu said. “The lender would take the loss of $23,500.”