Obama's $1.5 billion financing plan would help struggling homeowners in 5 states

By Michael D. Shear and Renae Merle
Washington Post Staff Writer
Saturday, February 20, 2010

LAS VEGAS -- President Obama unveiled a $1.5 billion program to aid the states hardest hit by the foreclosure crisis, a small but targeted effort to address a housing problem that continues to resist government solutions.

The program, which administration officials called an "innovation fund," is modest in size and reach and comes as the administration's chief foreclosure-prevention program faces criticism for not doing more to help borrowers.

Speaking to the Las Vegas Chamber of Commerce, Obama said the program would allow states to find new ways to help struggling homeowners. "That means that here in Nevada, we're going to be able to prevent some foreclosures that otherwise would have happened," he said Friday afternoon. "The goal is to target communities at the center of the crisis and to empower local agencies that know these communities best."

Obama made the same promise at a town hall meeting earlier in the day, telling about 1,700 people in Henderson, a suburb near Las Vegas, that "government has a responsibility to help deal with this problem."

He made the announcement alongside Senate Majority Leader Harry M. Reid (D-Nev.), who faces a tough reelection battle this year. "I have been working with President Obama and his administration on solutions to address Nevada's housing crisis for a while now, and this policy will help people who are struggling," Reid said.

Confronting the foreclosure issue is a key part of the White House's effort to convince Americans that the president is fighting for them during one of the worst economic downturns in generations.

Under the program, state housing finance agencies from California, Nevada, Arizona, Michigan and Florida will share the funds and test new approaches to the housing crisis. Those states have been among the hardest hit by foreclosures, with home values declining more than 20 percent. The initiative will be financed through the government's Troubled Assets Relief Program.

White House officials said the initiative is one of many efforts the administration has launched to help homeowners stay in their homes. But they also acknowledged the growing challenge that unemployment and falling home prices have posed to mortgage relief efforts, and said the state programs might generate solutions that could be applied more widely.

The administration's marquee foreclosure-prevention program, Making Home Affordable, was unveiled a year ago but has struggled to gain traction. Through January, the mortgage payments of nearly 1 million borrowers were temporarily lowered under the program, but most borrowers must prove they qualify for permanent aid and some are at risk of losing the help.

Housing advocates have complained that Making Home Affordable, which lowers payments to 31 percent of income, is not well suited for two growing groups of troubled borrowers: unemployed people who might not be able to afford any payment, and those who owe more than their home is worth.

About 20 percent of borrowers find themselves owing significantly more than their homes are worth, a situation known as being underwater. Those borrowers are at greater risk of foreclosure, and banking industry officials worry that they will abandon their mortgages.

Many borrowers are also saddled with a second mortgage, such as a home-equity loan, which can be difficult to modify. A federal program in which lenders would lower borrowers' payments on second liens has also struggled to get off the ground.

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