WASHINGTON — The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed.
Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be their unemployment insurance, for three to six months. In some cases a lender could allow a borrower to skip payments altogether, the Washington Post and New York Times reported, both citing unnamed administration officials.
The new push, which the White House is scheduled to announce today, takes direct aim at the major cause of the current wave of foreclosures: unemployment. While the initial mortgage crisis that erupted three years ago resulted from millions of risky home loans that went bad, more recent defaults reflect the inability of the jobless to keep paying.
The administration's new push also seeks to more aggressively help borrowers who owe more on their mortgages than their properties are worth, offering financial incentives for the first time to lenders to cut the loan balances of these distressed homeowners. Those who are still current on their mortgages could get the chance to refinance on better terms into loans backed by the Federal Housing Administration.
The problem of "underwater" borrowers has bedeviled earlier administration efforts to address the mortgage crisis as home prices plunged. Nearly half of all Tampa Bay homes with a mortgage were underwater at the end of 2009. First American CoreLogic said negative equity afflicted 48.5 percent of residential mortgages locally, or 332,968 homes.
The new initiatives will take effect over the next six months and be funded out of $50 billion previously allocated for foreclosure relief in the emergency bailout program for the financial system. No new taxpayer funds will be needed, the Washington Post reported.
After the bruising battle over health care on Capitol Hill, the Obama administration is welcoming a chance to change the subject and turn its attention to the economy and, in particular, the plight of the unemployed — concerns that are paramount for many Americans. President Barack Obama will release the details of the program today.
So far, fewer than 200,000 borrowers have received permanent loan modifications under its $75 billion marquee program, known as Making Home Affordable. Assistant Treasury Secretary Herbert Allison told a House panel Thursday that "we did not fully envision the challenges that we would encounter" when the earlier program was launched.
In addition to mortgage relief for unemployed borrowers, the new program includes several steps to address the growing population of borrowers who owe significantly more than their homes are worth.
The first key element is that the government will provide financial incentives to lenders that cut the balance of a borrower's mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than the home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.
Second, the government will double the amount it pays to lenders that help modify second mortgages, such as piggyback loans, which enabled home buyers to put little or no money down, and home equity lines of credit. These second mortgages are an added burden on struggling homeowners, especially when their total debt, as a result, is greater than their home value.
Third, the new effort also increases the incentives paid to those lenders that find a way to avoid foreclosing on delinquent borrowers even if they can't qualify for mortgage relief. For example, through short sales.
Fourth, the administration is increasingly turning to the Housing Administration to help underwater borrowers. The aim is to help these borrowers refinance. The FHA will offer incentives to lenders that reduce the amount borrowers owe by at least 10 percent.