The Obama administration on Friday announced a $14 billion program to shore up the housing market by giving lenders incentives to slash some mortgage debt and reduce mortgage payments for the unemployed.
As the housing market struggles under the weight of an epidemic of foreclosures there was disturbing evidence last week that the malaise is spreading from subprime mortgage holders to homeowners with good credit.
Delinquencies on U.S. mortgages rose to nearly 14% in late 2009, led by a sharp increase in seriously overdue home loans held by the most credit-worthy borrowers.
[mm-toolbar]The new plan expands Treasury Department and Federal Housing Administration (FHA) efforts and will be funded through the $50 billion already allocated to housing programs under the Troubled Asset Relief Program, or TARP, the government said.
"It's almost like a triage policy," Eric Barden, chief investment officer of Barden Capital Management in Austin, Texas told Bloomberg. "It limits the losses of the most overvalued properties and it also limits the losses to the borrowers that are in the most distress."
The new measures mark a departure from programs announced last year, which concentrated on reducing interest rates for struggling borrowers who got risky loans.
Instead, the latest efforts are directed at unemployed workers and homeowners living in areas where home values have plummeted across the board. In some of those areas, it makes more financial sense for homeowners to walk away from the house because they owe more than the house is worth.
Roughly 8 million, or 15%, of homeowners with mortgages are behind on their payments or already in the foreclosure process. And more than 11 million households are underwater on their home mortgages, according to data from First American CoreLogic, The Wall Street Journal reported.
The administration came under a barrage of criticism last week from legislators who say the government hasn't helped enough homeowners avoid foreclosure. Rep. Dennis Kucinich, D-OH, who swung his vote in support of Obama's landmark healthcare legislation last week, slammed the administration for failing to take any "bold, new" initiatives for underwater borrowers.
"What are we doing to help those people who owe more on their homes than the home is worth?" Kucinich asked the official responsible for overseeing the bailout, according to Reuters.
Under terms of the new program, banks participating in the Home Affordable Modification Program, or HAMP, will be forced to consider writing down the principal for eligible borrowers whose mortgage debt is more than 115% of the current value of their homes. The principal would be reduced in stages over three years if the borrowers keep their payments current.
The government would pay lenders 10 to 21 cents in federal subsidies for every dollar of principal they cut, depending on the borrower's situation.
In another program, the FHA will offer borrowers a new way to refinance into a smaller loan. The program is voluntary and relies heavily on lenders' willingness to participate. The main thrust of this FHA initiative is to give borrowers with strong finances more incentive to stay in homes that have lost much of their value. The administration also announced a program to provide reduced mortgage payments for three to six months for unemployed borrowers to help them keep their homes while hunting for a new job.
Foreclosures are expected to climb to 4.5 million this year from 2.8 million in 2009, according to RealtyTrac Inc., an Irvine, California-based research firm.
The HAMP program was announced in 2009 and has temporarily reduced the payments for more than a million borrowers, but only around 170,000 borrowers have received permanent modifications. The program has fallen far short of meeting the goals of the government's foreclosure-prevention program. Bank of America Corp. (NYSE: BAC) said on Wednesday it would offer up to $3 billion in loan forgiveness to about 45,000 troubled homeowners after Massachusetts Attorney General Martha Coakley put pressure on the lender.
The new measures won't try to shield investors, speculators, people in million-dollar homes or those who default on vacation properties, the administration said in a statement obtained by The Journal "Some people simply will not be able to afford to stay in their homes because they bought more than they could afford," the statement said.
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