Obama Administration Unveils Plan to Shrink Home Loans for Some Americans
The multifaceted effort will let people who owe more on their mortgages than their properties are worth 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. But it could spark criticism that the government is shouldering too much risk by taking on bad loans made during the housing boom. In addition, their existing mortgage companies will be able to receive incentives to lower their principal balances.
The program also includes assistance to help unemployed homeowners keep paying their mortgages.
The plan is the latest effort by the Obama administration to tackle the foreclosure crisis which has continued to grow under its watch. 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 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. That program was delayed for months but with Citi on board, the major players in the industry are now on board.
Critics have complained that the Obama administration has done little until now to encourage banks to cut borrowers' principal balances on their primary loans. Nearly one in every three homeowners with a mortgage is "under water" -- they owe more than their property is worth -- according to Moody's Economy.com.