WASHINGTON — The Obama administration on Wednesday began the most ambitious effort since the 1930s to help troubled homeowners, offering lenders and borrowers big incentives and subsidies to try to stem the wave of foreclosures.
People with mortgages as high as $729,750 could qualify for help, and there is no ceiling on how high their income can be as long as they are in danger of losing their homes. Interest rates on loans could go as low as 2 percent for some. Many homeowners could see their mortgage payments drop by several hundred dollars a month, and some could save more than $1,000 a month.
Administration officials estimate that the plan will help as many as four million people avoid foreclosure, at a cost to taxpayers of about $75 billion. In addition, the Treasury Department said it intended to follow up with a plan to help troubled borrowers with second mortgages, which many homebuyers used as “piggyback” loans to buy houses with no money down.
The plan is bolder and more expensive than any of the Bush administration’s programs, which were based almost entirely on coaxing lenders to voluntarily modify loans. While the number of loan modifications has climbed sharply, the number of foreclosures skyrocketed to 2.2 million at the end of 2008, a record.
The new plan, which takes effect immediately, is intended to win much bigger concessions from lenders by offering a mix of generous financial incentives and regulatory arm-twisting. The final impact will depend on how both lenders and the investors who own mortgages respond, but housing experts said the administration had a good chance of achieving its goal.
The eagerness with which lenders agree to modify loans is likely to be affected by a bill that the House is expected to take up on Thursday.
It would give bankruptcy judges the power to order changes in mortgages on primary residences and would protect loan-servicing companies from lawsuits by investors.
Several of the nation’s biggest mortgage-servicing companies, overseeing two-thirds of all home loans in the country — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo & Co. are expected to participate in the plan.
In addition, any bank that receives additional federal money under the Treasury Department’s $700 billion financial rescue program will be required to take part. But many lenders are expected to participate voluntarily, because the government would be absorbing much of the cost of resolving their bad loans.
“I predict this program will be extremely effective at reducing foreclosures,” said Eric Stein, senior vice president at the Center for Responsible Lending, a nonprofit advocacy group for homeowners.
Administration officials have similar expectations.
“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” said Timothy F. Geithner, the Treasury secretary.
In releasing detailed guidelines on the plan, first unveiled Feb. 17, the Treasury Department made it clear that the program would not help every homeowner in trouble. It will do little to help families whose income has evaporated because one or more breadwinners have lost their jobs, nor will it save those swamped by big debts beyond their mortgages. It will not do much for homeowners who are current on their loans but “upside down” — owing more than their houses are worth.
Still, the program, when combined with a separate effort to help homeowners refinance their loans even if they are not in distress, could help put a floor under home prices.
The Treasury has instructed Fannie Mae and Freddie Mac, the two government-controlled mortgage-finance companies, to refinance homeowners at today’s low market rates even if the owners have less than the standard 20 percent equity that is usually required.
This second program applies to about 30 million people with mortgages owned or guaranteed by Fannie or Freddie, but will not be available to people whose mortgages are much higher than their home’s market value.
Administration officials said it could lower monthly payments for as many as five million homeowners. To finance that effort, the Treasury is providing the two companies with up to $200 billion in additional capital, on top of $200 billion that it had already pledged to them.
Under the new loan modification guidelines, the Treasury will offer mortgage-servicing companies upfront incentive payments of $1,000 for every loan they modify and additional payments of $1,000 a year for the first three years if the borrower remains current. The Treasury will also chip in $1,000 a year to directly reduce the borrower’s loan amount, if the borrower stays up to date on payments.But the biggest subsidies are in reducing the size of a person’s monthly payment. If the lender reduced the borrower’s monthly housing payment to 38 percent of the household’s gross monthly income, the Treasury Department would match, dollar for dollar, the lender’s cost in reducing payments down to 31 percent of monthly household income.
The program calls on lenders first to reduce interest rates to as low at 2 percent for the next five years to hit the monthly income target. After five years, some borrowers would start to pay gradually higher rates, but their rates could not exceed the market rate at the time they renegotiated.
That would be a favorable deal for many people. At the moment, the market rate for such loans is just over 5 percent — very low by historical standards.
The key to determining whether a person receives help will be a so-called net present value calculation by the mortgage company.
In essence, a lender will first have to calculate how much it would cost to reduce a person’s monthly payments to an “affordable” range, 31 to 38 percent of the borrower’s monthly income.
If the calculation shows that the lender’s cost in modifying the loan, after receiving the taxpayer subsidy, would be lower than the cost of foreclosing, the lender would be required to offer a borrower the new deal. If the estimated cost of the concessions appeared to be higher than the cost of foreclosure, the decision would be voluntary.
Housing experts estimate that lenders lose about half the outstanding loan amount if they pursue foreclosure, and those losses are climbing as the resale value of houses continues to fall. As a result, the program could lead to millions of loan modifications.
Borrowers cannot be charged any modification fees, the Treasury Department said. Lenders will have to bear the administrative expense of reviewing the loans and making their cost estimates. Treasury officials said they were trying to warn consumers against fraud artists and consultants who are seeking to collect fees for helping homeowners negotiate with lenders.
There is no ceiling on how much a person can earn and still qualify for help, but the size of the mortgage to be modified cannot be higher than $729,750 for a single-family home, or $1.4 million for the mortgage on a four-unit condominium or cooperative.
The program is open only to borrowers who live in the homes at issue, and not to investors or people with mortgages on second or third homes. It is open to people who obtained a mortgage before Jan. 1, 2009. Borrowers can apply for loan modifications until the end of 2012.
