By: David Streitfield
March 26, 2010
Will it work this time?
Once again, the federal government is adding to its arsenal of programs for troubled homeowners, seeking to help those who urgently need it while neither angering nor creating perverse incentives for those who do not.
Some of these people, if the government plan works, will emerge with a house whose payments they can afford and whose new mortgage reflects its market value. Unlike many previous modification recipients, they would presumably be less likely to re-default, helping to stabilize a housing market that remains queasy.
"We're walking that delicate balance to make sure these solutions are sustainable and not temporary," said David H. Stevens, commissioner of the Federal Housing Administration.
It is a balancing act in numerous ways. If the plan falls short -- and some experts were skeptical on Friday -- the Obama administration could find itself having to start over yet again in six months or a year.
"The housing market is the Vietnam War of the American financial system," said Howard Glaser, a housing consultant. "The federal government is in so deep, they have to keep ramping up to find a way out."
The latest programs, together with foreclosure assistance efforts already in place, are aimed at helping as many as four million embattled owners keep their houses. But the measures, which will take as long as six months to put into practice, might easily fall victim to some of the conflicting interests that have bedeviled efforts to date. None of these programs have the force of law, and lenders have often seen no good reason to participate.
To lubricate its efforts, the government plans to spread taxpayers' money around liberally. For instance, it had previously planned to give homeowners that sell their homes rather than let them go into foreclosure a "relocation assistance" payment of $1,500. The plan announced on Friday increases that amount to $3,000.
All told, the new measures are expected to cost about $50 billion. The White House was careful to stress that the money will come from funds already set aside for housing programs in the Troubled Asset Relief Program. There will be "no additional commitment of taxpayer dollars," Michael S. Barr, an assistant secretary of the Treasury, said at the White House briefing.
Here is what the $50 billion is supposed to buy:
The simplest component of the plan involves assistance to unemployed homeowners. Mortgage companies will now be encouraged to reduce payments for at least three months and possibly six months while the homeowner pursues a new job.
To be eligible, borrowers must submit proof they are receiving unemployment insurance. The new payments will be 31 percent or less of their monthly income. The missing money will be tacked onto the loan's principal.
A second and more complicated program is a requirement that mortgage servicers consider writing off a portion of a borrower's loan to get it down to a more manageable level.
Borrowers in the government modification plan who owe more than 115 percent of the value of their home and are paying more than 31 percent of their monthly income toward the mortgage are eligible. The write-downs are to take three years, with the borrowers in essence being rewarded for making their payments on time.
The third major new program strays the farthest from the government's previous approach. Borrowers who owe more on their homes than they are worth will get a chance to cut their debt -- providing the investor or bank who owns the loan agrees.
Mr. Stevens of the F.H.A. said the program was "for responsible homeowners who through no fault of their own find themselves in a situation of negative equity."
There is no official requirement that these homeowners be in distress, but it would probably make the investor more receptive to a deal. Whether homeowners will scheme to get into the program is one of the big uncertainties.
The investors will write down the loans to 97.75 percent of the appraised value of the property, at which point the F.H.A. will refinance them through new lenders. The F.H.A., which currently insures about six million homes, will insure the new loans as well.
If the homeowner has a second mortgage, as many do, the total value of the new mortgage can be as much as 115 percent of the value of the property. The F.H.A. will spend up to $14 billion to provide incentives to the banks that service the primary loan as well as the owners of the secondary loans. Some of the money will also provide additional insurance on the new loans.
Numerous parties will have to work together to make these deals fly. The primary loan might have been bundled into a pool and sold to investors during the housing boom. The investor must agree to cut the principal balance for a deal to work, and any bank holding a second mortgage on the property would have to go along, too.
The only incentive for the first lien holder is a quick exit from a loan that might ultimately default. Payments for second lien holders will be made on a sliding scale.
Early reaction to the refinance program among lending groups was less than enthusiastic.
"The magnitude of this program will likely be measured in the tens of thousands rather than the hundreds of thousands of borrowers," said Tom Deutsch, executive director of the American Securitization Forum. Both banks and investors belong to the forum.
The Mortgage Bankers Association, which represents the banks that service the primary loans and own outright many of the secondary loans, warned that "each servicer will need to determine whether this is the best approach to help the individual borrower."
The new proposals irked many people, who flooded online forums Friday. Some said those in trouble deserved their fate. Others asked why the government was propping up housing prices when many renters still could not afford to buy a house. And some wondered about the message these rescue plans were sending to those who resisted the housing bubble.
Dave Juliette, a software worker in Pittsburgh, is in the last group. He paid off his loan eight years ahead of schedule and now owns his house free and clear. "I'm a homeowner in a more genuine sense of the word than many of these people with mortgages," Mr. Juliette said. "But I won't be seeing a dime."
Sewell Chan and Louise Story contributed reporting.