The Obama administration is trying to jump-start its sputtering
attempts to tackle the foreclosure crisis with an effort to assist
homeowners who owe more on their properties than their homes are
Starting Tuesday, the Federal Housing Administration will permit
lenders to give these borrowers refinanced loans backed by the
government. The lenders will be required to forgive at least 10
percent of the original mortgage amount. Investors who have control
over the mortgages as part of their large portfolios will select
which borrowers are invited to participate.
The plan was first announced in March. Its rollout represents the
latest of numerous efforts by the administration to address the
housing bust. So far, the government has only nibbled around the
edges of the crisis, as its programs have run into numerous
The lending industry was ill-prepared for a crush of distressed
homeowners, the economy worsened and millions of homeowners had
taken on so much debt that their financial woes have been nearly
impossible to resolve.
Nearly half of the 1.3 million homeowners who have enrolled in the
Obama administration's main mortgage-relief program -- overseen by
the Treasury Department -- have already fallen out over the past
Many borrowers say the government program is a bureaucratic
nightmare, with banks often losing their documents and then
claiming borrowers did not send back the necessary paperwork. Banks
say borrowers often didn't return the required documents.
The new refinancing program takes a different approach. It allows
investors in mortgage-backed securities to evaluate their holdings
and select borrowers that will be offered refinanced mortgages
guaranteed by the FHA.
The theory is that there are some loans that investors simply want
to unload because they have a high risk of default.
However, when faced with the choice between slashing the amount
borrowers owe on their home loans and foreclosing, lenders have
generally chosen to foreclose on borrowers. Many experts doubt the
new program will persuade investors to change their minds.
Government officials acknowledge that getting the plan going will
be complicated. FHA Commissioner David Stevens said in a statement
that it "requires significant coordination and operational
execution by several parties to be successful."
The government estimates that between 500,000 and 1.5 million
homeowners could be helped. But Stevens said the number of
borrowers who actually benefit will likely be toward the low end of
Even so, Keefe, Bruyette & Woods Inc. analyst Bose George
called the government's estimates "extremely optimistic." George
said investors are likely to only offer refinances to borrowers who
have seen their home values plunge to the point where they owe 40
percent more than their home's current value. Those homeowners, he
said, are in danger of walking away from their mortgages.
"We're assuming that the impact is minimal," he said.
The program is funded with $14 billion from the Obama
administration's existing $75 billion mortgage assistance program.
That money will be used to cover incentive payments to lenders and
losses from borrowers who fall back into foreclosure.
To qualify, borrowers must be up-to-date on their mortgages, though
many people who have already received loan modifications through
other programs are still eligible. The plan is limited to loans in
which homeowners owe at least 15 percent more than their home's
Analysts at Barclays Capital estimated last month that the
refinancing program would only aid between 200,000 and 300,000
homeowners. If it reaches that many, it would be a small share of
the number of Americans with so-called underwater mortgages.
As of the end of June, about 11 million U.S. homes, or 23 percent
of those with a mortgage, were in this position, according to real
estate data provider CoreLogic.
Written by: Alan Zibel, AP Real Estate Writer