WASHINGTON — The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure, by helping them refinance into more affordable mortgages backed by public funds, government officials said.
The proposal is aimed at assisting borrowers who owe their banks more than their homes are worth because of plummeting home prices, an issue at the heart of the nation’s housing crisis. Under the plan, the Federal Housing Administration would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government.
The plan is similar to elements in legislation proposed two weeks ago by Rep. Barney Frank, D-Mass., who is chairman of the House Financial Services Committee, officials said. Administration officials said they believe they can accomplish some of the same goals through regulatory changes, though important details have yet to be nailed down.
If enacted, the plan would mark the first time the White House has committed federal dollars to help the most hard-pressed borrowers, people struggling to repay loans that are huge relative to their incomes and the diminished value of their homes. That may offer encouragement to the banking industry and help silence Democrats, who have accused the White House of rescuing Wall Street investment banks while ignoring distressed homeowners. But it could agitate conservatives, who are likely to view the FHA plan as yet another government bailout.
Senior officials in several parts of the administration described the plan but insisted on anonymity because the specifics are still being worked out. It is unclear when the plan will be formally unveiled, though one official said it was unlikely to happen before the president returns from a trip next week to Europe.
“The administration for a long time had the idealists and the pragmatists. And because the market conditions are what they are right now, the pragmatists are looking at this and saying, ‘How can we achieve something?’ And they seem to be having more sway,” said Francis Creighton, vice president for government affairs at the Mortgage Bankers Association, which has been working with Frank on his proposal.
The initiative now being crafted could provide relief to a select group of homeowners who are upside-down on their mortgages, a term that describes the situation when falling home prices leave borrowers with negative equity. These homeowners would have to agree to stay in their homes after refinancing, be able to afford the new monthly payments and have lenders who are willing to go along with the plan, officials said.
Administration officials have yet to iron out other details, such as how big the new mortgage should be relative to the home’s value.
An estimated 8.8 million households currently have negative equity, in part because of the rise of loans that often required no money down. Negative equity becomes a problem when the homeowner can no longer make mortgage payments. In normal times, the loan would be refinanced or the house would be sold. But a homeowner who has negative equity cannot afford to do those things because the new loan or sale proceeds would not cover the cost of the existing mortgage.
Treasury Secretary Henry Paulson Jr. signaled in a speech Wednesday that the administration was developing an initiative tailored to this specific problem, saying “the people we seek to help” are those who want to keep their homes but are falling behind on their payments.
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