Obama administration officials on Friday ramped up their attempts to help struggling homeowners, announcing major changes to the government's much-criticized $75-billion program to modify mortgages to avoid foreclosures.
The most significant change is a set of complex new incentives for banks and investors to reduce the principal on so-called underwater mortgages -- loans for homes now worth less than what is owed.
In addition, the administration announced that many unemployed homeowners could receive three to six months of reduced mortgage payments while they look for a job.
Together, the revisions are designed to spur the Home Affordable Modification Program to reach its target of helping 3 million to 4 million homeowners avoid foreclosure through 2012.
While the changes are significant to a year-old program that so far has helped just 170,000 homeowners receive permanently lowered mortgage payments, administration officials stressed they would only make 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. 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," said Diana Farrell, deputy director of the White House's National Economic Council.
Many analysts have said reducing principal on underwater mortgages is the key to helping borrowers stay in their homes. The administration's program, and other government efforts before it, have tried to do that with little success. The permanently modified mortgages, and about 1 million ongoing three-month trial modifications that could become permanent, have reduced monthly payments by extending the terms of the loan.
To further help people eligible for modified mortgages, the administration said it would require mortgage servicers participating in the program, including such major companies as Bank of America Corp. and JPMorgan Chase & Co., to reduce monthly mortgage payments for three to six months for unemployed homeowners as they look for new jobs. The payments would be reduced to 31% of the homeowner's current income.
After the temporary period, homeowners who still have a mortgage payment of more than 31% of their gross monthly income would have to be considered for a permanently modified loan. The program is open to people who live in the home they purchased, took out their mortgage before Jan. 1, 2009, and have a loan balance below $729,750.
Rep. Barney Frank (D-Mass.) said he was pleased the administration decided to provide additional help for unemployed homeowners.
"While clearly there are some people in trouble on their mortgages who bear some of the responsibility for their plight, this is not true of the unemployed who are fully deserving of this help," Frank said.
To encourage mortgage servicers and investors holding the loans to reduce the principal, the administration announced several steps Friday.
* All banks and servicers participating in the HAMP program are now required to consider principal write-down as part of the modification process.
* The Treasury Department will increase cash incentives to banks and servicers who write down the principal on loans, particularly on second mortgages.
* Allow lenders to refinance underwater first and second mortgages through the Federal Housing Administration, which provides federal guarantees to mortgage loans. The FHA will receive $14 billion from the modification program to cover some of the losses for banks and investors of those write downs -- at 10 cents to 20 cents on the dollar -- as well as the additional risk faced by the agency for default of the refinanced mortgages.
"It's actually in the interest of lenders to reduce the loan balance because those will be sustainable, higher quality loans," Farrell said. "Similarly, it's in the interest of borrowers to get into a loan that they actually can afford."
Even when those loans are refinanced by the FHA, the homeowner would still be underwater -- just not so deep, said FHA Commissioner David H. Stevens. The standard for the FHA refinancing would be new loans that are no more than 115% of the value of the home. But that level will get a homeowner close enough to break even -- with the hope of getting there as home values rise again -- that it would significantly reduce the risk of foreclosure.
"If you can get the borrower close to the 115% range and below there's a much better chance that the borrower is going to be able to stay in their home," said Assistant Treasury Secretary Michael S. Barr.
John Taylor, president of the National Community Reinvestment Coalition, applauded the administration for continuing to try to improve its mortgage modification program. But while the changes will help avoid some foreclosures, Taylor said officials continue to only "tinker around the edges of foreclosure prevention." He isn't not optimistic that many mortgage servicers and investors would be lured by the incentives.
"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."