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New Mortgage Plan to Focus on Lowering Payments

By Renae Merle
Washington Post Staff Writer
Wednesday, February 18, 2009

When President Obama announces his $50 billion foreclosure prevention program in Arizona today, it will represent one of the most ambitious efforts yet to turn around the worst housing crisis in decades.

The plan will include several elements, including ones that focus on encouraging lenders to lower borrowers' payments to affordable levels, perhaps by having the government subsidize lower interest rates, sources familiar with the proposal have said. It will also establish industry standards for modifying troubled loans. Those could include extending the terms of loans or giving borrowers a short-term break on payments.

But it is still unclear how the plan will deal with the growing number of borrowers whose home values have plummeted so that they now owe more than the home is worth. They are among the most likely to fall into foreclosure. The administration, for example, has not indicated whether it would press lenders to lower the amount a borrower owes to match the current value.

The plan "will encourage servicers and lenders to do the right thing and give relief to struggling homeowners," a Democrat familiar with the proposal said last night.

Developing the foreclosure prevention program has been daunting, as government officials have attempted to provide enough help to stem foreclosures while not rewarding borrowers who purposefully stop paying, sources familiar with the discussion have said. The administration also focused on developing a plan that would not put too much taxpayer money at stake.

Obama's plan will supplant a series of government foreclosure prevention efforts that have fallen short of expectations. For instance, Congress established Hope for Homeowners late last year to help troubled homeowners refinance into new loans. But since that program was launched in October, no homeowners have received such loans.

The face of much of the Bush administration and industry effort has been Hope Now, an alliance of lenders. But consumer advocates have complained that lenders remain difficult to contact and often agree to loan modifications that are unaffordable for the borrowers, who quickly end up delinquent again.

Thousands of homeowners have been anxiously awaiting news of Obama's plan, including Greg Chase, 53, a Fairfax County government employee. He moved to Virginia in 2005 after Hurricane Katrina and bought a four-bedroom home in Fairfax in October 2006, at the height of the housing boom. At the time, the $475,000 house appeared to be a good deal.

With a 30-year, fixed-rate loan, Chase said, he didn't feel like he was taking a big risk. "Just a regular June and Ward Cleaver type house," he said. "I legitimately qualified for my mortgage, I put money down."

Since then, his wife has lost her job and home values in the neighborhood have tumbled, Chase said. Even though they made a $25,000 down payment, Chase said he now owes more than the house is worth.

In late December, Chase said he called the Hope Now hotline, but was misdirected into a delinquency program, a situation that took weeks to unravel. "It went wrong," he said. "I don't think there was any malicious behavior, I just got caught up in the bureaucracy."

Chase cashed in his 401(k) to avoid missing any payments, but is worried about how long he can go on. "The bottom line is I don't want to lose my house. If my wife is able to get a job next week, things would be fine, but then you see those job reports," he said. "I am not looking for anybody to give me anything, just a little bit of help, something to make a little difference."

A key part of the administration's package is expected to be legislation changing the bankruptcy law to allow judges to modify the mortgages of distressed homeowners, including by reducing the principal of the loan to the property's current market value. About 150 consumer bankruptcy lawyers descended on Capitol Hill last week to lobby for the measure. It has already passed a House committee, but faces fierce opposition from the financial services industry and Republicans.

"These attorneys see every day the real-world impact of the failure over the last 18 months of meaningful solutions from Washington," said Maureen Thompson, of National Association of Consumer Bankruptcy Attorneys.

Credit Suisse has estimated that more than 8 million mortgages could fall into foreclosure during the next four years. In the Washington region, the number of properties involved in the foreclosure process activities jumped 161 percent last year, to 50,148, according to the Center for Regional Analysis at George Mason University.

Foreclosures have hit a plateau in some markets, but could spike again as a second wave of risky loans adjust to higher payments starting in late 2009, said John McClain, deputy director of the center.

"What Obama does for helping the foreclosure situation is key to preventing that wave from getting here," McClain said.

Staff writers Binyamin Appelbaum, Neil Irwin and Michael Shear contributed.

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