By Renae Merle
Washington Post Staff Writer
Wednesday, April 29, 2009
The Obama administration unveiled an expansion of its $75 billion foreclosure prevention plan yesterday, providing new subsidies to mortgage lenders and investors.
Under the expanded plan, some homeowners could see their payments fall significantly and the interest rate on their second mortgage pushed down to 1 percent. The announcement comes nearly two months after the administration launched the housing program, called Making Home Affordable. While officials said some borrowers have already received help, the foreclosure rate is rising and it could be months before the program begins to have an impact.
The new efforts address, in part, criticisms from consumer advocates that the administration's housing plan did not go far enough and that borrowers still face too many barriers to receiving help.
"Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind," Treasury Secretary Timothy F. Geithner said in a statement.
The administration's housing plan pays lenders to help borrowers stay in their homes by modifying their mortgages to an affordable level. But, the plan as first announced in February applied only to primary mortgages. Now, lenders will be eligible for payments when they modify the terms of a second mortgage, including a home-equity line.
About 50 percent of at-risk borrowers have a second mortgage, which can make it difficult for them to afford their homes even after payments are cut on their primary mortgages. Second mortgages were popular during the housing boom for buyers who could not afford big down payments.
Under the new plan, lenders would receive $500 for modifying the second mortgage, plus $250 a year for three years if the loan remains current. The borrower would be eligible for $250 a year for five years to lower their principal balance. The borrower could have the interest rate lowered to 1 percent, depending on the type of loan, with the government sharing the cost of the rate reduction.
Senior administration officials said they expect the second-mortgage program to help 1 million to 1.5 million of the up to 4 million households expected to be covered by the wider loan-modification program. The program, which will take several weeks to get running, will be paid for through bailout funds already allocated to the program, officials said.
The expansion is a step in the right direction, but remains voluntary for many banks, consumer advocates said. In many cases, lenders are being paid to act in their own best interest, said Edward R. Morrison, a professor at Columbia Law School, who has studied loan modification efforts. "I wonder whether it's paying too much to get to the right solution," he said. "We don't need to throw money at everybody."
The Treasury Department also is attempting to breathe new life into another government foreclosure prevention program, called Hope for Homeowners. That program, launched last year, refinances homeowners into more affordable mortgages. But lenders have balked at requirements that they cut some of the principal that borrowers owe. Only one homeowner has received a government-backed loan under the program so far.
Now, lenders will receive $2,500 to refinance a borrower into Hope for Homeowners and $1,000 a year for up to three years as long as the borrower stays current.
This could help address the rising number of borrowers who owe more than their home is worth, known as being underwater. First American CoreLogic, a research firm, has estimated that one in five mortgage holders fall into that category, and that as home prices tumble, more borrowers are on the brink of losing equity.
"Underwater borrowers are more likely to be at risk of foreclosure, so increasing equity for these homeowners through Hope for Homeowners will be an important tool for the Administration," a Treasury statement said.
Meanwhile, a coalition of mortgage investors is fighting a provision in a housing bill that would shield lenders from lawsuits. Lenders have said they are unable to change some mortgages because they fear being sued for breaking their contracts with investors who own pools of mortgages.
The safe harbor provision was included in the House version of the housing bill without much controversy. But in recent weeks, investors have begun organizing against it, including a coalition that hired lobbying firm Patton Boggs.
The coalition argues that lenders have overstated the contract problems and can already modify mortgages. Instead, they say, the provision would shield banks from unrelated lawsuits.
"The safe harbor provision protects mortgage servicers from lawsuits alleging misconduct in the past and future," said Micah Green, a Patton Boggs lobbyist.
Green declined to name the coalition's members, saying the group is still being formed, but that so far it represents about 10 firms that manage more than $100 billion in mortgage investments.
The Senate is expected to vote on the provision as part of a larger housing bill tomorrow.