The multifaceted effort will allow people who owe more on their mortgages than their properties are worth to get new loans backed by the Federal Housing Administration, a government agency that insures home loans against default.
That would be funded by $14 billion from the administration’s existing $75 billion foreclosure-prevention program. It could spark criticism that the government is shouldering too much risk by taking on bad loans made during the housing boom.
The plan would also enable the borrowers’ existing mortgage companies to receive incentives to lower their principal balances.
To be eligible for the FHA refinancing program, borrowers who owe more than the value of their homes, known as being “under water,” must not have fallen behind on their existing mortgage payments.
Separately, the program also would reduce monthly payments for unemployed homeowners for up to six months.
The administration cautioned that the plan isn’t intended to stop all foreclosures or assist all troubled homeowners.
“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.
Meet original target
Instead, officials said, the goal is to make it more likely the administration will meet its original target, announced last year, of assisting 3 million to 4 million struggling homeowners.
That 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 will not 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 an additional 1 million and 1.5 million homeowners avoid foreclosure. That compares with about 4.5 million already in foreclosure proceedings or 90 days delinquent on their mortgages, he 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 to keep paying their mortgages as prices stabilize.
“The changes are wide-ranging and significant and have the real potential for bringing the foreclosure crisis to a much quicker end,” Zandi said.
It is the latest effort by the Obama administration to tackle the foreclosure crisis which has continued to grow. Home foreclosures have soared despite the administration’s effort to prevent foreclosures, a complex and problem-plagued endeavor involving more than 100 mortgage companies. Only 170,000 homeowners have completed that process out of 1.1 million who began it over the past year.
“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 Friday will also 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 designed to give banks an incentive to reduce payments or eliminate second mortgages such as home equity loans — a 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 combined total of second mortgages and other liens cannot be more than 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.