The Washington Post
By: Renae Merle and Michael D. Shear
February 19, 2010
LAS VEGAS -- President Obama will announce a plan Friday to direct $1.5 billion in taxpayer money to five state housing finance agencies to help them develop new programs for addressing the housing crisis in their communities, according to a senior administration official.
The five states -- California, Nevada, Arizona, Michigan and Florida -- have been among the hardest hit by the housing crisis and have seen home values decline more than 20 percent. The initiative will be financed through the government's Troubled Assets Relief Program (TARP).
Obama is scheduled to make the announcement in Nevada on Friday morning alongside Senate Majority Leader Harry M. Reid (D-Nev.), who faces a tough reelection battle this year.
Confronting the foreclosure issue is a key part of the White House effort to convince Americans that the president is fighting for them during one of the worst economic downturns in generations.
White House officials stressed Thursday night that the new initiative is just one of many efforts that the administration has launched to help homeowners stay in their homes. They said the money should spark innovative and effective programs in the affected states to speed relief to homeowners. The officials spoke on condition of anonymity because the plan had not yet been announced.
In discussing the plan, officials acknowledged the growing challenge that unemployment and falling home prices have posed to mortgage relief efforts. The administration's marquee foreclosure-prevention program, known as Making Home Affordable, which was unveiled a year ago but has struggled to gain traction. Through January, nearly 1 million borrowers had their mortgage payments lowered under the program, but most still must prove they qualify for the mortgage aid and were at risk of losing the help.
Loan modification programs such as Making Home Affordable focus on lowering a borrower's payments. But unemployed borrowers may not be able to make any mortgage payments at all. About 20 percent of borrowers now find themselves owing significantly more than their home is worth, a situation known as being underwater. Those borrowers are at greater risk of foreclosure, and banking industry officials worry these homeowners will just abandon their mortgages.
Many borrowers are also saddled with a second mortgage, such as a home-equity loan, which can be difficult to modify. A federal program to have lenders lower borrowers' payments on second liens has also struggled to get off the ground.
"We do recognize that the problem is both deeper and evolving," an administration official said.
The plan is likely to disappoint housing advocates who have been calling on the Obama administration to vastly expand Making Home Affordable with steps that would include pushing lenders to cut the principal owed by underwater borrowers.
This is the second administration program aimed at bolstering state housing finance agencies, which typically provide loans to low- and moderate-income borrowers. In November, the Treasury Department injected $29 billion into the agencies, which have struggled as investors shied away from buying their debt, making it difficult for them to finance loans.
Under the new initiative, state housing finance agencies would be asked to create locally tailored solutions to the housing crisis, a senior official said. The solutions could range from mortgage relief that would keep distressed borrowers out of foreclosure to more general efforts to strengthen the housing market, including home-buying programs, the official said.
"We want to encourage things that have not happened yet," the official said. "I don't think anything is being excluded."
For example, the official said, a more than 20-year-old Pennsylvania program that offers unemployed workers low-interest loans to pay their mortgages, appears to have been successful. Under that program, borrowers are eligible for loans of up to $60,000 that can be repaid over an extended period with payments as low as $25 a month.
The housing market has strengthened in the past year with a tax-credit for first time homebuyers and low mortgage rates drawing out buyers for cheap properties. But many economists are concerned the market could weaken again if interest rates rise as expected later this year and more borrowers fall into foreclosure, dumping properties onto the market.