Housing plan's reach is limited

The housing plan unveiled by President Obama on Wednesday goes further than any previous effort to break the vicious cycle of declining home values, rising mortgage defaults and frozen credit that triggered the country's worst recession since the 1930s.

And it embraces strategies that attack the complex problems on several fronts but without requiring a long struggle in Congress.

Even so, there is doubt about whether the initiative will be bold enough and swift enough to succeed where other efforts have failed.

"It's a positive step in the right direction," said economist Mark Zandi of Moody's Economy.com. "I think it will be much more successful than those that preceded it. I worry that it's not going to be successful fast enough."

The plan has two main elements aimed at the twin problems feeding the foreclosure crisis that is claiming more than 6,000 homes a day: "underwater" mortgages on which the balance owed is more than the current value of the property, and unaffordable loan payments that are forcing homeowners into default.

Obama presented the plan in an appearance outside Phoenix and said it would help arrest the slide in the overall economy.

"All of us are paying a price for this home mortgage crisis," he said. "And all of us will pay an even steeper price if we allow this crisis to deepen."

One part would allow borrowers whose homes have lost value to refinance their mortgages at today's relatively low interest rates, even if the homeowner has little or no home equity left. To be eligible, borrowers must live in their homes and have a loan that is owned or guaranteed by Fannie Mae or Freddie Mac.

The opportunity to refinance will help "homeowners who have played by the rules [and] have been making their payments on time" but have been unable to refinance because collapsing housing prices have eroded the equity in their homes, said Housing Secretary Shaun Donovan.

The plight of those borrowers, Donovan added, "just isn't fair, and it's something that we will help to fix."

Because the refinancing program will lower payments for many middle-class families, it will directly benefit the overall economy, Treasury Secretary Timothy F. Geithner said.

"In that case, it acts like stimulus," he said.

The second part of the plan is a loan modification program designed to keep troubled homeowners out of foreclosure and to keep "at risk" borrowers from defaulting in the first place. It would accomplish that by offering new incentives to lenders and mortgage servicers to modify loans.

If the lender agrees to reduce the monthly payment to 38% of a borrower's monthly income, the government will pay half of the additional cost of lowering the payment to 31% of the borrower's income.

Unlike earlier foreclosure prevention efforts, the Obama plan doesn't require that homeowners be behind on their mortgage payments to be eligible for help. In fact, the program will pay loan servicers a higher incentive fee if a modification is done before a borrower falls behind.

"Programs have typically required 90-day delinquency," Donovan said. "We believe that we have to move this modification process earlier to help people be successful."

Sheila Bair, head of the Federal Deposit Insurance Corp., applauded that feature of the plan. The FDIC has implemented a widely praised loan modification program at Pasadena-based IndyMac Federal Bank, which the agency has been running since the lender's failure last year.

"The FDIC has long felt that the missing link, really, in all of our strategies so far is we've not tackled the problem at the core, which is at-risk borrowers," Bair said. The result has been "millions of unnecessary foreclosures, weighing down home prices and creating a lot of external costs for neighborhoods, communities and the economy as a whole."

What the Obama loan-modification plan does not do is mandate that lenders take part in either of the programs. But financial institutions that have received capital infusions under the $700-billion Troubled Asset Relief Program will be required to follow the government's protocols, which will be issued March 4. Other lenders can offer the new loans at their discretion.

Furthermore, the plan doesn't require lenders participating in the loan modification plan to reduce the principal of mortgages on houses that have lost value. The modifications will lower monthly payments, but the homeowner's outstanding debt will probably not change.

The plan also does not help borrowers with "jumbo" mortgages -- generally those above $417,000 in much of the country, or as much as $730,000 in higher-priced areas. That could be a significant gap in parts of California, Illinois, Florida and other areas that had superheated home markets.

And the plan doesn't address the problem of borrowers with second mortgages, such as home equity lines of credit. Any modification or refinancing would apply only to the primary mortgage.

"I'm not impressed," said Dean Baker, a housing specialist with the Center for Economic and Policy Research. "There are some good things in there. I think giving servicers incentives is a good thing. But it's mostly money for banks, not money for homeowners.

"The banks still decide who gets into this, and that's been a problem all along."

Administration officials predicted lenders would take part in greater numbers than in the past.

The administration also supports changing federal bankruptcy law so that judges can unilaterally reduce the mortgage debt owed by borrowers in bankruptcy proceedings. But that change would require an act of Congress, and it has proved controversial in the past.

Administration officials acknowledged that their plan would not prevent all foreclosures.

"There are speculators who are not owner-occupants who will continue into foreclosure because this program is not targeted for them," Donovan said. "There are families, frankly, whose debt is so high that even with this modification, we're not going to be able to help them."

The number of people who are "underwater" on their mortgages has risen to 10 million to 15 million, but the Obama initiative aims to help only 7 million to 9 million, said Patrick Newport, an economist with IHS-Global Insight.

"Obama's plan is an ambitious one, more ambitious than analysts had been led to expect," he said. "Whether it will stop the bloodletting, however, time will tell."

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maura.reynolds@latimes.com

Times staff writers Jim Puzzanghera and Janet Hook in Washington contributed to this report.

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Highlights of the plan

Mortgage payments

Lower payments for up to 4 million borrowers who are behind on their home loans or at risk of falling behind:

* Voluntary for the industry;

* Lower payments would last five years;

* Loan owners would absorb most of the payment reductions, with the government subsidizing the rest;

* Cost: $50 billion.

Refinancing

Would help borrowers who can't refinance now because their home values have fallen too much:

* Would benefit up to5 million homeowners;

* Current loans must be owned or guaranteed by Fannie Mae or Freddie Mac;

* Cost: $25 billion.

Bankruptcy law

Changes in law would let judges unilaterally alter a mortgage's terms.

Source: Times research

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