Obama administration announces effort to slash mortgages for unemployed borrowers
Friday, March 26, 2010; 10:55 AM
The Obama administration announced new ways Friday to tackle the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed.
The Treasury Department said adjustments to the Home Affordable Modification Program and the Federal Housing Administration program would help "responsible homeowners who have been affected by the economic crisis through no fault of their own" by expanding flexibility for mortgage servicers and originators to assist more people who are unemployed and who have been hit by falling home values.
"These changes will help the administration meet its goal of stabilizing housing markets by offering a second chance" to as many as 3 million to 4 million struggling homeowners through the end of 2012, Treasury said in a statement. It said costs would be shared between the private sector and the federal government, with the federal costs funded through a $50 billion allocation for housing programs under the Troubled Asset Relief Program.
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 the amount of unemployment insurance, for three to six months. In some cases, a lender could allow a borrower to skip payments altogether under the plan.
The new push takes direct aim at the major cause of the current wave of foreclosures: the spike in 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 country's economic downturn and the inability of jobless borrowers to keep paying.
The administration 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 such 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. Underwater borrowers now make up about a quarter of all homeowners, according to First American CoreLogic. Economists consider these homeowners at higher risk of default because they cannot sell or refinance their home when they run into financial troubles.
Officials said 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 officials said.
The measures have been in the works for weeks, but the Obama administration finally released the details days after the president's watershed victory on health-care legislation. Following that bruising battle on Capitol Hill, President Obama is now 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.
The administration has been facing increasing pressure from lawmakers and housing advocates to overhaul its foreclosure prevention efforts. So far, fewer than 200,000 borrowers have received permanent loan modifications under its $75 billion marquee program, known as Making Home Affordable. In the meantime, there is a growing backlog of distressed borrowers awaiting help from their lenders, which threatens to undercut efforts to stabilize the housing market.
Assistant Treasury Secretary Herbert M. Allison Jr. told a House panel Thursday that "we did not fully envision the challenges that we would encounter" when the earlier program was launched.
The efforts have been hampered by the difficulty of helping unemployed homeowners, who struggled to qualify for the government's mortgage relief plan. In requiring temporary relief for jobless borrowers, known as forbearance, officials are hoping to give them time to find a new job. Some will still need more assistance after the six-month period while others will ultimately lose their homes, administration officials said.