WASHINGTON — The Obama administration expanded its efforts to prevent Americans from losing their homes, unveiling a program Tuesday that's designed to give financial incentives for companies to modify the terms of troubled second mortgages.
The new effort builds on the Making Home Affordable program, which was announced on Feb. 18 to arrest the rising rate of foreclosures by lowering homeowners' monthly payments. The administration now will give cash rewards to mortgage servicers, who act as bill collectors for investors who own pools of mortgages.
As many as 6 million homeowners nationwide are thought to be at risk of foreclosure over the next several years, potentially prolonging the worst housing slump in modern times and delaying an economic recovery. The administration hopes to help 4 million of these homeowners avoid foreclosure.
"Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system," Treasury Secretary Timothy Geithner said in a statement.
The new effort addresses a key obstacle to loan modification.
While many mortgage service companies have agreed to modify distressed primary mortgages, efforts have been hampered by the holders of second liens, commonly called second mortgages. These lienholders had little incentive to forgive principal or rework loan terms when the primary mortgage servicers did so, since there was no payment for them.
"The Administration's plan offers a practical way over a hurdle that has proved insurmountable in too many cases, forcing homes into foreclosure even though the homeowner could afford to sustain the loan on reasonable terms," said Ellen Harnick of the Center for Responsible Lending, a consumer advocacy group in Durham, N.C. "These avoidable foreclosures have cost neighboring homeowners billions of dollars in lost home equity."
The Treasury Department expects to spend $75 billion rescuing troubled mortgages. Under the new and mostly voluntary plan, the Treasury Department will pay $500 to second lien servicers that agree to modify a homeowner's second mortgage, and another $250 a year in each of three years if the homeowner remains current on his or her payments.
There's also a built-in incentive of $250 a year for five years for as many as 1.5 million homeowners if they stay current on payments for their second mortgages. This government subsidy would go toward paying down what they owe on the principal for their primary mortgages.
For the popular interest-only loans that got a lot of homeowners in trouble, the government will share the cost of getting the second mortgage down to a rate as low as 2 percent.
In a standard mortgage, the government will share the costs of bringing a low-cost second mortgage that has both principal and interest down to an interest rate as low as 1 percent.
Breaking new ground, the administration is also offering incentives to second lienholders to extinguish some loans. If a homeowner is 180 days late on his or her second mortgage, the Treasury Department will pay a second lienholder three cents for every dollar of loan value extinguished. There will be a more aggressive, yet unspecified payment, for second lienholders that extinguish loans before a homeowner is six months late on the payments.
The entire Making Home Affordable effort is designed to bring payments down to between 31 percent and 38 percent of a homeowner's monthly income before taxes. The administration said Tuesday that servicers covering 75 percent of primary mortgages are participating in the program.
Just as with the effort with primary mortgages, the program for second lienholders is voluntary, unless the lienholder is a major U.S. bank that's receiving Wall Street bailout money. This means homeowners with mortgages serviced by Citibank, Bank of America, Wells Fargo and other big banks that have taken government funds could benefit.
However, many homeowners with distressed mortgages have loans that are in the hands of investment trusts. Over the past decade, millions of mortgages were pooled together, sliced and diced and packaged into mortgage bonds or securities that were sold to investors in a secondary market.
This process is called securitization. It allowed for the expansion of home ownership, but it now is complicating efforts to halt the soaring rate of exposures because the mortgage servicers, who collect monthly mortgages and distribute these payments to investors in the mortgage bonds or securities, are bound to serve the interests of investors, not homeowners.
The Bush administration failed to make much headway in getting mortgage servicers to rework loans, and the Obama administration is now trying a new tack, using Wall Street bailout money to reward mortgage servicers that rework distressed mortgages.
In a conference call for reporters, senior administration officials confirmed that the Obama administration is backing efforts in the Senate to pass legislation to revamp the failed Hope for Homeowners program from last year. That effort would have the government share some of the losses when a lender agrees to forgive a significant chunk of the lost value in a home.
Under a new Hope for Homeowners program, the Treasury Department would buy special pools of mortgages to provide more cash for the efforts.
In states where home prices soared by record rates — Florida, California, Arizona and Nevada — many homes are now underwater, meaning, for example, that they carry a mortgage of $400,000 but now have a value of only half that much. Banks have been reluctant to forgive the difference, and Hope for Homeowners was designed to provide some incentives, but it had virtually no takers among lenders.
At the White House, Press Secretary Robert Gibbs said: "The affordable home program, I think, is another continued step by the administration to do what we can, first and foremost, to ensure that people that have played by the rules, but in many ways because of what they owe compared to the decline in their housing value" are able to take advantage of refinancing.
(Margaret Talev contributed to this article.)
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