White House offers plans to avert foreclosures

Criticized for its "ready, fire, aim" approach to reducing foreclosures through voluntary mortgage modification, the Obama administration announced plans yesterday to more actively help homeowners who are unemployed or owe more than their houses are worth.

Under the rules that previously governed the Home Affordable Modification Program, unemployed homeowners could not qualify for mortgage assistance.

As outlined by the Treasury Department, the "enhancements," to be funded by $50 billion from the Troubled Asset Relief Program, include these changes:

Instead of lowering interest rates or extending loan maturities, or both, to reduce monthly mortgage payments to 31 percent of household income, lenders would gradually lower the principal if homeowners remained current on their payments.

Greater monetary incentives would be offered to second-lien holders who wrote down their loans. About half of all troubled mortgages have second liens that can hamper mitigation efforts.

Federal Housing Administration lending would be expanded to ease refinancing for homeowners "deeply underwater" but still current on existing mortgages whose balances were higher than the value of their homes.

Lenders would be encouraged to reduce mortgage payments for temporarily unemployed workers to an amount equal to 31 percent of the borrowers' unemployment benefits for up to six months.

Immediately, the new approach generated debate.

Some housing experts called it an improvement on the current program, which the Government Accountability Office, in a report Thursday, said remained "overly optimistic" about the number of troubled borrowers it would help, and which TARP inspector general Neil Barofsky called a " 'ready, fire, aim' type of approach."

Mark Zandi, chief economist for Moody's Economy.com, said the program's new provisions offered "incentives to lenders to reduce homeowners' principal, a critical element for millions living with underwater mortgages."

A preliminary estimate suggested the changes could spare 1 million to 1.5 million homeowners from foreclosure, Zandi said.

Others criticized the new approach for its continued reliance on the voluntary cooperation of 113 lenders participating in the government's program. Some, such as Bank of America, have their own modification programs.

Center for Responsible Lending president Michael Calhoun said he was concerned that mortgage servicers were not required to participate, "and homeowners have little control over the outcome."

"It's important to understand that the [government's] entire Making Home Affordable program and FHA refinancing system relies on incentives without any mandates - we have carrots, but no sticks," Calhoun said.

Rick Sharga, chief economist for RealtyTrac Inc. of Irvine, Calif., which monitors foreclosures nationwide, saw as good the likelihood that the changes "will have the effect of delaying the initiation of new foreclosure actions."

Such a delay might not save a house, Sharga said, but it might provide time for the owner to sell it or find a job.

That's not good enough for John Dodds, director of the Philadelphia Unemployment Project, who has been advocating direct loans to jobless homeowners in trouble.

"A short-term forbearance plan is very disappointing and misses an opportunity to provide real aid to jobless Americans struggling to keep their homes," Dodds said.

Bureau of Labor Statistics data show that 6.1 million people, or 40 percent of all those who are unemployed, have been jobless for more than 26 weeks. In February, the typical unemployed American had been out of work 30 weeks, the bureau said.

More than 11.3 million, or 24 percent, of all residential properties with mortgages had negative equity - known as "being underwater" - at the end of 2009, according to First American CoreLogic Inc., which tracks such data.

Sharga said the program's new provisions might work if lenders used them "to off-load loans that are only slightly upside down," making those mortgages cheaper to write down than foreclose on.

2006: A homeowner receives a 30-year fixed-rate mortgage, with a balance of $250,000 and an interest rate of 9 percent. Monthly payment: $2,000; monthly income, $6,500.

2010: Homeowner has been unemployed for four months, collecting benefits equal to $2,000 per month.

Under new Home Affordable Modification Program rules: Mortgage payment is set for six months at 31 percent of current monthly income or lower (about $620), cutting payments by nearly $1,400 per month and postponing payments for six months while homeowner looks for work.

At the end of six months: Homeowner is employed, resumes payments of $2,000 per month, plus interest that accumulated during the modification period. If the homeowner takes a lower-paying job or has other financial hardship, a permanent modification, excluding temporary income, will be considered. Payment would be set at 31 percent of new, lower monthly income.

SOURCE: Home Affordable Modification ProgramEndText