By Mike Colpitts
In a new effort by the Obama administration millions of under-water home mortgage borrowers may be helped. The FHA program will provide refinancing on homes at least 10% under their worth, and could establish a new cornerstone in White House efforts to stem the growing foreclosure epidemic.
The program demonstrates a major shift in the administration’s housing rescue position by reducing the amount of mortgage principal owed on a home.
The initiative expands the government’s foreclosure prevention program by paying bankers double what they have been paying in order to incentivize banks to cut the amount of mortgage principal owed on homes from the Troubled Assets and Relief Program.
The plan marks the first time that TARP funds will be used to pay bankers directly for cutting the amount of principal on mortgages.
Until now only mortgage bank servicing companies have been paid to lower mortgage amounts or payments. The amount or percentage bankers are being paid to slash mortgage principal has not been released.
However, the White House took a step back from its efforts to get tougher on bankers under the program by making the plan voluntary for bankers. Under the program FHA will double the amount paid to bankers to modify second mortgages. The first mortgage and a second loan or line of credit on the property cannot exceed the market value of a home by more than 15%.
White House officials said the new program is not intended to help all troubled borrowers, but those that have the best chance of recovering from economic turmoil. The plan is structured to help only owner occupants with mortgages of less than $729,750. The program will only help homeowners who are current on their mortgage. Investment properties would not be covered by the plan.
The program is aimed at helping homeowners who have lost their jobs or are having difficulty making their mortgages because of other financial hardships. The FHA would refinance mortgages at lower rates and with lower principal balances in efforts to stem the tide of increasing homeowners who are walking away from their mortgages as a result of losing equity in their homes.
Lenders are not required to take part in the program or be forced to lower mortgage amounts, but bankers will be required to determine whether modifying mortgages would be in the best interest of investors, who hold the mortgages.
Critics were quick to fault the program for being similar to another White House plan also implemented by the FHA in late 2008, under which only 35 homeowners refinanced instead of the 400,000 forecast by the Obama administration. The new program is expected to be implemented over the next several months.