By: MICHAEL M. PHILLIPS and RUTH SIMON | Wall Street Journal
WASHINGTON -- The Obama administration announced details of a housing-rescue plan it said would help as many as one in nine homeowners, from low-income Americans struggling to avoid foreclosure to well-off borrowers who owe more than their homes are worth.
The announcement came two weeks after President Barack Obama said he would spend $75 billion on the housing component of an emergency economic plan that includes a financial-system bailout and a $787 billion spending-and-tax-cut package.
The package represents an effort to tackle the political challenges inherent in any housing rescue. While the administration wants a sweeping program that would prevent millions of foreclosures, it doesn't want to be seen as rewarding the greedy or reckless.
"It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive," Treasury Secretary Timothy Geithner said in a written statement.
The administration, which was criticized for its rollout of its financial-sector rescue last month, got a generally warmer reception for the details of the foreclosure program. The Dow Jones Industrial Average rose 149.82 points, or 2.2%, snapping a dismal losing streak in recent days.
It remains uncertain how successful the administration will be in overcoming one of the biggest problems to forestall private efforts to fix troubled mortgages: the objections of investors who own mortgage-backed securities.
The administration estimates the new plan will cover as many as nine million mortgage holders. It has two main components.
First, the government will offer financial incentives and subsidies to persuade mortgage-servicing companies to ease up on borrowers who are in financial straits so severe that they risk losing their homes. Borrowers will have to sign affidavits attesting to their financial hardships. In return, they will see their interest rates drop to as low as 2%, their payment periods lengthened, and other modifications aimed at bringing their monthly payments to 31% of their income -- commonly considered a reasonable ratio. This program will be limited to first-lien mortgages with outstanding principal balances that don't exceed $729,750, in the case of single-family homes.
Loan-servicing companies will receive up to $3,500 from the government to participate, with the government also matching a portion of the lenders' costs, dollar-for-dollar. Homeowners will get as much as $5,000 apiece in federal money to reduce their outstanding balances, as a way to encourage them to stay current on the modified mortgages.
Administration officials made a point of noting that the loan-modification program will not aid people who bought homes merely as investments; the program is designed for those who live in their homes.
In coming weeks, the administration plans to announce how it will help servicers persuade creditors holding second loans on the same properties to extinguish those debts. Roughly half of delinquent subprime borrowers also have second mortgages, according to Credit Suisse Group. Thus far, that has proved an impediment to modifying mortgages.
The second main component of the plan calls for Fannie Mae and Freddie Mac, the government-backed mortgage giants, to refinance loans for millions of borrowers who may owe more than their homes are worth, even if they are wealthy enough to afford their current payments. There is no income ceiling for beneficiaries. But they must have mortgages held or guaranteed by Fannie Mae or Freddie Mac, and they cannot owe more than 105% of the current value of their home.
That raises the possibility that homeowners considered well-off by national standards may qualify for public aid.
A Treasury spokeswoman said that there are benefits to helping some well-off homeowners. "The recent decline in home values has left many responsible borrowers, through no fault of their own, in a position where they can't take advantage of today's low rates through a refinancing," she said. "It is in the best interest of American homeowners to be able to refinance to lower-rate mortgages. And this, in turn, is good for home prices, for consumer spending during a downturn, and for liquidity in our mortgage markets."
At the end of last year, an estimated 13.6 million U.S. borrowers owed more on their homes than their properties were worth, according to Moody's Economy.com, up from 11.8 million at the end of the third quarter.
The release of the government's new guidelines will likely accelerate efforts already under way at the nation's largest banks. Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc. all have unveiled loan-modification efforts over the past few months. They instituted foreclosure moratoriums after the government announced that it, too, was preparing to tackle the issue. They will likely soon resume foreclosing on properties that they have determined aren't eligible for loan modifications.
Many banks, which had worried about possible hits to earnings when the plan first was announced, welcomed it on Wednesday. "The plan appropriately balances the interest of homeowners, mortgage servicers and investors," said Jamie Dimon, chief executive of J.P. Morgan Chase.
Some investors who own mortgage securities, however, remained skeptical.
Under the loan-modification plan, a hypothetical borrower earning $4,000 a month, with a $225,000, 6.5% loan with 28 years remaining, could see the rate fall to 2.73%, and the monthly payment drop to $1,240, from $1,737, according to Thomas Lawler, an independent housing economist. The government would cover about $155 of the $495 payment reduction. Principal payments and federal subsidies would reduce the outstanding balance to $193,000 after five years. Without the federal program, the principal would have fallen to $208,000, assuming the borrower kept current.
Mortgage Bankers Association President John Courson said that the Obama program, by setting an industry standard, will help servicers, who are hired by investors to collect mortgage payments each month, defend themselves against complaints that they aren't acting in investors' interests by modifying loans. But Mr. Courson added that servicers might be reluctant to act without congressional protection from lawsuits.
The administration is "not going to see eye-to-eye" with some investors, said a senior Treasury official. "Our role is not to use taxpayer resources to bail them out."
Citigroup will apply the new program to all loans held by investors, "unless there's a contractual obligation that specifically prohibits us from doing that," said Sanjiv Das, chief executive of the bank's CitiMortgage unit.
Bank of America "will work with our investors to allow these programs to be extended for borrowers whose loans they own," said spokesman Dan Frahm.
Calls from borrowers interested in loan modifications "really spiked" on Wednesday, said Barbara Desoer, Bank of America mortgage president.
Administration officials acknowledged that it could take time for troubled borrowers to move through the system. "People need to be patient and understand that servicers are likely to get lots of telephone calls and lots of inquiries," a senior White House official said.