WASHINGTON – The Obama administration unveiled new measures Friday aimed at getting lenders to reduce the principal balances on problem mortgages and to refinance “underwater” borrowers, who owe more than their homes are worth, into government-sponsored loans.
The initiatives are part of an escalating effort to buoy the housing market – and an acknowledgment that more steps are needed to prevent a fresh wave of foreclosures from swamping the still-fragile housing market.
One provision will allow many unemployed homeowners to get three to six months of reduced mortgage payments while they look for a job.
But the most significant change to the $75 billion program is aimed at helping underwater borrowers. It would do this by encouraging banks to reduce the principal on loans in default and by refinancing troubled loans into Federal Housing Administration-backed mortgages.
With the changes announced Friday, the administration hopes its Home Affordable Modification Program will meet its target of helping 3 million to 4 million homeowners avoid foreclosure through 2012.
To date, just 170,000 people have gotten permanently lowered mortgage payments under the year-old program – which barely puts 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,” said Diana Farrell, deputy director of the White House’s National Economic Council.
“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.”
Slashing the principal on underwater mortgages is seen by many experts as a key to helping borrowers stay in their homes, but the administration has resisted such a move as it could encourage some borrowers to fall behind on their mortgages intentionally – sticking taxpayers with the bill.
But under greater pressure from the government, and with more foreclosures looming, lenders are suddenly warming to the idea.
On Wednesday, Bank of America Corp. said it would offer to erase as much as $3 billion in principal owed by thousands of severely delinquent borrowers.
“There have been growing pains in that program. I think that we all think that we could have certainly done better,” Assistant Treasury Secretary Michael Barr said. “And as the crisis unfolded, we wanted to be mindful of the need to adjust the program along the way.”
Still, the new incentives just “tinker around the edges” of the problem, said John Taylor, president of the National Community Reinvestment Coalition. Taylor is concerned that the new incentives won’t be strong enough to get mortgage servicers and investors to modify loan terms.
Others say the administration is going too far, and is rewarding people who made bad financial decisions or bet that housing prices would keep soaring. Rep. Jeb Hensarling, R-Texas, said Friday that the administration’s program had been nothing short of “an abject failure” and the decision to expand it by providing incentives for write-downs was troubling.
“This is another bank bailout that will reward irresponsible borrowers and lenders,” Hensarling said.
“Homebuyers are taxpayers too, and there is nothing about these efforts that is taxpayer-friendly.”