Administration officials cautioned that the plan won’t stop all foreclosures or help all troubled homeowners. Instead, officials said their goal is to meet their original target, announced last year, of helping 3 million to 4 million borrowers avoid foreclosure.
The new effort is designed to help two groups:
— Borrowers who owe more on their loans than their houses are worth. Nearly 15 million homeowners fall into this category, according to Moody’s Analytics. About 10 million of them owe at least 20 percent more than their house’s current value.
These people would be helped in either of two ways: Their mortgage companies can cut the total amount they owe on their mortgage. Or they can refinance into loans backed by the Federal Housing Administration, which insures loans against default. The FHA will get $14 billion in incentive money from the federal bailout fund.
— Unemployed borrowers. People receiving unemployment benefits would see their mortgage payments drop to no more than 31 percent of their monthly income — but only for three to six months. That’s intended to give homeowners more time to find a job. Once they do, they may qualify for a loan modification that would permanently reduce their payments.
The administration’s existing program to prevent foreclosures has failed to make a dent in the problem. A lack of planning and shifting rules on qualifications for it produced a huge backlog in the program, the special inspector general for the federal financial bailout fund told lawmakers this week. Only 170,000 homeowners have completed loan modifications out of 1.1 million who began the program over the past year.
Today, administration officials played down any notion that the new plan would solve the foreclosure epidemic. About 6 million homeowners have missed at least two months of payments.
“There’s no intention here of tackling what may be 10 to 12 million foreclosures over the course of the next three years,” said Diana Farrell, a White House economic adviser. But she said the plan would be “enough to provide help to those for whom help is worthwhile ... and to provide some kind of stability in the market.”
The plan won’t assist investors and speculators or “Americans living in million dollar homes or defaulters on vacation homes,” an administration fact sheet said.
Some homeowners won’t be able to afford to stay in their homes because they bought more than they could afford, officials said.
Mark Zandi, chief economist at Moody’s Analytics, estimated the plan could help 1 million and 1.5 million homeowners avoid foreclosure, compared with about 500,000 if no changes were made in the program.
“The changes are wide-ranging and significant and have the real potential for bringing the foreclosure crisis to a much quicker end,” Zandi said.
But preventing even a fraction of potential foreclosures could help stem the slide in home prices. That would encourage those who are “under water” — who owe more than their homes are worth — to keep paying their mortgages as prices stabilize.
Some are unconvinced.
“We remain dubious about government mortgage modification efforts,” wrote Jaret Seiberg, an analyst with Concept Capital’s Washington Research Group. “So far none have lived up to expectations, and we see little reason to believe the latest effort will turn out any different.”
The plan announced today will require the mortgage companies participating in the administration’s existing foreclosure prevention program to consider slashing the amount borrowers owe. They will get incentive payments if they do so.
It also includes three to six months of temporary aid for borrowers who have lost their jobs. And there will be additional payments to give banks an incentive to reduce payments or eliminate second mortgages such as home equity loans. That problem that has blocked many loan modifications.
The plan will also allow lenders to refinance mortgages that are under water with a new loan backed by the FHA. Lenders will have to reduce the first mortgage by at least 10 percent. And the total mortgage debt cannot exceed 115 percent of the current value of the home.
The four big holders of second mortgages — Citigroup Inc., Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — have now joined the government’s program to modify second mortgages, after pressure from the Treasury Department. That program was delayed for months but now the major players in the industry are on board.
Rep. Barney Frank, D-Mass., said today that he would call top executives from the four big banks to a hearing next month. “We will be urging the banks to show full cooperation with this plan,” he said in a prepared statement.
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