Principal Write Downs New Option in Obama Foreclosure Plan
The White House announced today a broad new expansion of its foreclosure prevention initiative aimed at reducing mortgage loan balances by refinancing millions of delinquent borrowers into government-backed loans with lower payments.
After widespread criticism that previous efforts have done little to halt foreclosures, the Obama administration is launching a large-scale effort to reduce mortgage principal, including second liens and home equity lines of credit.
In addition, the program will help unemployed borrowers by offering temporary forbearance for a minimum of three months and up to six months. The government also wants to encourage lenders to write-down the principal balance of the loans for borrowers in the modification program. Until now, lenders were lowering only the interest rates on loans.
Under the plan, the Federal Housing Administration will take on a much larger role by trying to help borrowers who are current on their loans but who are underwater. The program will allow underwater borrowers to reduce their loan balance by refinancing into FHA-backed loans.
To encourage banks and investors holding the loans to reduce the principal, the Treasury will increase cash incentives to banks and servicers who write-down the principal on loans, particularly on second mortgages.
In a written statement, the Treasury said the new initiatives will take effect over the next six months and be funded out of $50 billion previously allocated for foreclosure relief in Troubled Asset Relief Program (TARP).
But the new plan could spark protest among borrowers who have kept up their payments and are not delinquent on their loans. The Obama administration has been facing increasing pressure from Congress and housing advocates to overhaul its foreclosure prevention efforts. Only 170,000 borrowers have had loan modifications under the $75 billion Making Homes Affordable program. Meanwhile, some 11.3 million borrowers owed more than their homes were worth at the end of 2009, according to First American CoreLogic, a real estate information company based in Santa Ana, Calif.
Here’s an FAQ from the Treasury. For more background on the enhancements to the Making Homes Affordable Program, click here.
Like the government’s previous efforts, it hard to tell if loan servicers will voluntarily participate in the new write-down program. If recent history has taught us anything, it will probably be as successful as the Treasury’s Home Affordable Modification Plan (HAMP).
What are your thoughts?