Thursday, March 25, 2010

Watchdog Blasts Obama Loan Relief Plan


Gov't to unveil plan to shrink some home loans
Gov't to unveil plan to shrink home loans for some troubled borrowers, aid jobless

WASHINGTON (AP) -- The Obama administration will announce Friday a plan to reduce the amount some troubled borrowers owe on their home loans, after months of criticism that it hasn't done enough to prevent foreclosures.
The effort will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, people briefed on the plan said. It would be funded by $14 billion from the administration's existing $75 billion foreclosure-prevention program.
The people briefed on the plan declined to be identified because the details had not yet been announced.
It has several additional components. The plan also will require the more than 100 mortgage companies participating in the administration's existing foreclosure prevention program to consider slashing the amount borrowers owe. They will get incentive payments if they do so.
It also will include three to six months of temporary aid for borrowers who have lost their jobs. And there will be additional payments designed to give banks an incentive to reduce payments or eliminate second mortgages such as home equity loans -- a problem that has blocked many loan modifications.
The changes "will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own," an administration official said.
To date, the administration's $75 billion foreclosure-prevention program has been a disappointment. Critics have complained the program does little to encourage banks to cut borrowers' principal balances on their primary loans. Nearly one in every three homeowners with a mortgage are "under water" -- they owe more than their property is worth -- according to Moody's Economy.com.
Earlier in the day, Herbert Allison, an assistant Treasury secretary, cautioned that any new plan is "not going to mean that all underwater mortgages are suddenly in the program."
Obama administration officials have been studying such issues for months. An expansion of its foreclosure-prevention program has long been expected because only 170,000 homeowners have completed the process out of 1.1 million who began it over the past year.
And lawmakers have been frustrated by the lack of results.
"It has failed," said Rep. Jackie Speier, D-Calif., at hearing of the House oversight committee on Thursday. "It has failed miserably and unfortunately we are incapable of saying: OK, this was an experiment, it didn't work, let's try something else."
The program is designed to lower borrowers' monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms up to 40 years. To complete the program, homeowners need to go through a three month trial period and provide proof of their income, plus a letter documenting their financial hardship.
Though $75 billion in funding is available to the more than 100 lenders who have signed up, only a tiny fraction has been spent. Lenders had received $58 million in incentive payments as of last month, according to the Government Accountability Office.
Meanwhile, one long-delayed piece of the government effort is finally getting off the ground. Citigroup Inc. on Thursday joined the government's program to modify second mortgages such as home equity loans. With Citi on board, now four big owners of second mortgages have joined.
Earlier in the week, Bank of America announced that it would forgive some of the principal for homeowners who owe more than their homes are worth. The Charlotte, N.C.-based banking giant said its plan would help about 45,000 of its most troubled borrowers. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth.
Making things more complicated are second mortgages, or so-called "piggyback loans." Many lenders made such mortgages during the boom years, allowing consumers to make a small or no down payment.
Worrying that they won't be repaid, lenders who extended second mortgages have been using their veto power to block borrowers' efforts to modify their primary mortgages.
Bank of America spokesman Rick Simon said "a good portion" of the bank's private investors have authorized it to modify the mortgages. He said, however, the principal reduction process gets more complicated when dealing with second mortgages owned by outside investors.
But part of the government's relief program, which modifies second mortgages, could eliminate that hurdle. Citigroup became the fourth large lender to commit to the program, part of the Obama administration's $75 billion loan modification plan. Bank of America, Wells Fargo & Co., JPMorgan Chase & Co. already participate.
Another positive sign: Investors who are increasingly in limbo as borrowers go underwater want some relief too, even if that means they make less money on the loans, said Jesse Litvak, a mortgage-bond trader at Jefferies & Co in New York.
"People are starting to come to the conclusion that they would like some closure to the matter, rather than having this thing just get kicked down the road," Litvak said.

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