Obama
plan to pay lenders to alter
troubled mortgages

Bloomberg News
March 4, 2009, 10:33AM

 

 

   The Obama administration set loan modification guidelines for its $75 billion homeowner rescue plan, agreeing to pay lenders for altering troubled mortgages while reducing borrowers’ interest rates as low as 2 percent.

   The initiative, first announced on Feb. 18, would require applicants for loan modifications to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.

   President Barack Obama’s initial proposal, the biggest federal foray into real estate since the Great Depression, ignited criticism from Republican lawmakers that the government would end up subsidizing homeowners who are financially capable of surviving the economic slump on their own.

  “This plan will help make home ownership more affordable for 9 million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans,” Treasury Secretary Timothy Geithner said today in a statement.

   Obama is seeking to curb a jump in foreclosures that, along with a drop in consumer credit, is lowering property values, dragging down the economy and keeping prospective homebuyers away. The housing market lost $3.3 trillion in value last year, and almost one in six owners with mortgages owed more than their homes were worth, according to a report last month by Zillow.com.

   The Obama plan is divided into two main parts: helping 3 million to 4 million homeowners who are at risk of foreclosure to lower their monthly payments by modifying loan terms; and using Fannie and Freddie to refinance the loans of 4 million to 5 million Americans who owe more than their homes are worth.

   For a loan modification, lenders would have to reduce the mortgage to no more than 38 percent of the borrower’s income. Then, the Treasury would share the cost for lenders to cut that debt-to-income ratio to 31 percent, the government said.

   The modifications would allow a lender to drop the interest rate to as little as 2 percent to achieve the ratio, and if necessary, extend the term or amortization of the loan to as long as 40 years. If more effort is needed, lenders can forbear the principal and in some cases forgive, or reduce, portions of the principal altogether, the documents show.

  “By providing servicers and holders of eligible residential mortgages with incentives to modify loans at risk of foreclosure, the program will promote sustainable alternatives,” the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and National Credit Union Administration said in a joint statement.

   Borrowers with loans originated before Jan. 1, 2009, will be eligible for the program, which runs through 2012. People living in their homes who have an unpaid principal balance of as much as $729,750 can participate.

   Fannie and Freddie, the mortgage-finance companies seized by regulators in September after their losses threatened to further disrupt the housing market, own or guarantee about $5.2 trillion of the $12 trillion residential home loan market.