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Obama administration to order lenders to cut mortgage payments for jobless
By Renae Merle and Dina Elboghdady
Washington Post Staff Writers
Thursday, March 25, 2010; 6:01 PM
The Obama administration plans to overhaul how it's tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday.
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 their unemployment insurance, for up to six months. In some cases, administration officials said, a lender could allow a borrower to make no payments at all.
The new push, which the White House is scheduled to announce Friday, 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's newest push also seeks to more aggressively help borrowers who owe more on their mortgages than their properties are worth, by encouraging lenders to cut the loan balances of millions of these distressed homeowners and possibly refinance into loans backed by the Federal Housing Administration. The problem of so-called "underwater" borrowers has bedeviled earlier administration efforts to address the mortgage crisis as home prices plunged.
The new initiatives are expected to take effect over the next half year and will be funded out of money remaining in the $700 billion bailout program for the financial sector, administration officials said. They said no new taxpayer funds would be needed.
The announcement comes as the administration faces 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. And the Inspector General for the Troubled Assets Relief Program has raised concerns that many borrowers may redefault even after receiving relief under the program.
In the meantime, there is a growing backlog of distressed borrowers awaiting help from their lender and threatening to hamper efforts to stabilize the housing market. The "program will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway," the inspector general said in a report released earlier this week.
In addition to mortgage relief for unemployed borrowers, the program features several other key elements, including several steps to address the growing population of borrowers who owe significantly more than their home is worth. Underwater borrowers now make up about a quarter of all households, 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.
For one, the government will for the first time provide financial incentives to lenders that cut the balance of a borrower's mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if it this amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years as long as the homeowner remains current on the loan.
Until recently, administration officials had been reluctant to encourage lenders to cut homeowner's principal balance, worrying this would encourage borrowers to become delinquent. But as federal regulators have struggled to make an impact on the foreclosure crisis, those qualms have weakened.
Second, government will double the amount it pays to lenders that help modify second mortgages, such as piggyback mortgages, which enabled home buyers to put little or no money down, home equity lines of credits. These second mortgages are an added burden on struggling homeowners, especially when their total debt, as a result, is greater than their home value.
Federal officials have estimated that about half of all troubled homeowners have a second mortgage and last year launched a program to encourage lenders to restructure them, but has struggled to get the effort off the ground.
Third, the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan.
By Renae Merle and Dina Elboghdady
Washington Post Staff Writers
Thursday, March 25, 2010; 6:01 PM
The Obama administration plans to overhaul how it's tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday.
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 their unemployment insurance, for up to six months. In some cases, administration officials said, a lender could allow a borrower to make no payments at all.
The new push, which the White House is scheduled to announce Friday, 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's newest push also seeks to more aggressively help borrowers who owe more on their mortgages than their properties are worth, by encouraging lenders to cut the loan balances of millions of these distressed homeowners and possibly refinance into loans backed by the Federal Housing Administration. The problem of so-called "underwater" borrowers has bedeviled earlier administration efforts to address the mortgage crisis as home prices plunged.
The new initiatives are expected to take effect over the next half year and will be funded out of money remaining in the $700 billion bailout program for the financial sector, administration officials said. They said no new taxpayer funds would be needed.
The announcement comes as the administration faces 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. And the Inspector General for the Troubled Assets Relief Program has raised concerns that many borrowers may redefault even after receiving relief under the program.
In the meantime, there is a growing backlog of distressed borrowers awaiting help from their lender and threatening to hamper efforts to stabilize the housing market. The "program will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway," the inspector general said in a report released earlier this week.
In addition to mortgage relief for unemployed borrowers, the program features several other key elements, including several steps to address the growing population of borrowers who owe significantly more than their home is worth. Underwater borrowers now make up about a quarter of all households, 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.
For one, the government will for the first time provide financial incentives to lenders that cut the balance of a borrower's mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if it this amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years as long as the homeowner remains current on the loan.
Until recently, administration officials had been reluctant to encourage lenders to cut homeowner's principal balance, worrying this would encourage borrowers to become delinquent. But as federal regulators have struggled to make an impact on the foreclosure crisis, those qualms have weakened.
Second, government will double the amount it pays to lenders that help modify second mortgages, such as piggyback mortgages, which enabled home buyers to put little or no money down, home equity lines of credits. These second mortgages are an added burden on struggling homeowners, especially when their total debt, as a result, is greater than their home value.
Federal officials have estimated that about half of all troubled homeowners have a second mortgage and last year launched a program to encourage lenders to restructure them, but has struggled to get the effort off the ground.
Third, the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan.
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