In March 2009, the Obama administration announced what it described as a $75 billion plan to end the foreclosure crisis by keeping defaulting owners in their homes. But in its first year it ended up helping only about 200,000 of the 7 million households that are behind on their mortgages and risk foreclosure. In March 2010, the administration said that it would significantly expand the program. The goals of the new effort were to refinance several million homeowners fresh government-backed mortgages with lower payments; to temporarily reduce the payments of borrowers who are unemployed and seeking a job; and to encourage lenders to write down the value of loans held by borrowers in modification programs.
The biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.
About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.
The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.
Additionally, the administration has decided that beginning on April 5, it will paying some underwater homeowners to leave their homes, in a program that will allow them to sell for less than they owe and give them a little cash to speed them on their way.
The program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
Industry insiders said a major impediment to the plan was that it relied on using subsidies to entice mortgage servicing companies to modify mortgages. The administration's incentives, the experts say, are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure. And some housing advocates said the leverage the administration needs to get large-scale action was left on the shelf by Congress, when the Senate in May rejected a plan to allow bankruptcy judges to modify mortgages, the so-called cramdown provision.
When the initial plan was announced, it appeared bolder -- and more expensive -- than any of the Bush administration's programs, which were based almost entirely on coaxing lenders to voluntarily modify loans. But it was hindered by the often arms'-length relationship between investors and properties, when the original mortgages had been bundled into securities.
Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.
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