WASHINGTON — The White House Version 2.0 mortgage-relief plan announced on Friday is a recognition that the moribund housing sector poses a grave threat to the nation's economic recovery. By the administration's own admission, however, the effort may save at best only a third of the homes facing foreclosure in coming years.
The new measures, funded through $50 billion already set aside for mortgage relief, seek to provide three-to-six-months of temporary help for newly unemployed homeowners in making mortgage payments.
They also ease the refinancing of mortgages now valued well above the current home price — so-called underwater mortgages — and give incentives to issuers of piggyback mortgages to get out of the way and allow a mortgage modification to happen.
The effort to have banks forgive principal gives greater incentive for homeowners in foreclosure-troubled states such as California, Florida, Arizona and Nevada to stay in their homes rather than hand the keys back to the bank, which would swell the glut of vacant or bank-owned homes on the market — and further depress home prices.
The White House was careful not to raise expectations too high, noting that up to 12 million foreclosures still could occur during the next three years. The new program seeks to help at most 4 million of those homeowners.
One in four homeowners is thought to be underwater, or owe more on a mortgage than the home's underlying value, according to researcher First American CoreLogic, a number that threatens to swamp refinance efforts.
Friday's proposals follow a steadily growing drumbeat of criticism about administration efforts to prod lenders and investors in housing securities to modify distressed mortgages aggressively. After a year of effort, fewer than 200,000 permanent modifications have taken place.
"We're trying to adjust to changing circumstances over time," Assistant Treasury Secretary Herbert Allison explained during the White House rollout of the upgraded mortgage relief program.
Advocacy groups have criticized the administration's prior effort as too timid. Elizabeth Warren, a Harvard University professor who heads the special Congressional Oversight Panel that oversees the expenditure of taxpayer bailout money, for months has warned that the Home Affordable Mortgage Program wasn't even keeping up with the pace of new foreclosure notices.
Lawmakers too have been pressuring Team Obama to give more aid to unemployed homeowners, especially those with good payment histories.
"While clearly there are some people in trouble on their mortgages who bear some of the responsibility for their plight, this is not true of the unemployed who are fully deserving of this help," said Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee.
The new program captured headlines Thursday night when word leaked of help to unemployed homeowners. Once the details came out Friday, however, it delivered less than expected.
Lenders and loan servicers who participate in the government's program are required to offer temporary relief, but it'll be help for a limited universe. First, borrowers must seek this help, must be collecting unemployment insurance and must be less than 90 days late on their mortgage payments.
That appears to exclude many of the record 6.1 million Americans who have been jobless for 27 weeks or longer.
"It's the first real step they've made on helping the unemployed, but it is not enough," said Michael Calhoun, the president of the Center for Responsible Lending, an advocacy group based in Durham, N.C.
Citing only "modest steps," Calhoun said the administration is navigating a political environment where taxpayers are sick of bailouts of any sort.
"The administration has been pretty sensitive to criticism that they're helping borrowers too much. I think that's reflected in this modest plan," he said.
Republicans weren't shy about labeling the effort another bailout.
Sen. Orrin Hatch, R-Utah, said in a statement that the new efforts were unfair to people "who work hard, pay their bills on time, and raise good families. They feel like they are being penalized for being responsible, and that's not right."
Some of the most important changes in the reworked Obama plan are technical.
A program to refinance underwater mortgages has been on the books for several years, but had virtually no bank participation. That's because there were few lenders willing to refinance or reissue such mortgages and risk consequences to their own creditworthiness if these loans went into default because of the sour economy.
The new Obama plan, however, will grant an important exception from such credit hits if a lender extinguishes an old mortgage, forgives principal and places the new loan into a Federal Housing Administration program.
Another barrier to modification has been second mortgages, especially in states where housing prices soared. Issuers of these second mortgages had little incentive to extinguish their claim and help the borrower and issuer of the primary mortgage modify mortgages.
Under the revamped effort, the government will double payments to second lien holders that agree to extinguish their claims. Before, they got 10 cents on the dollar for doing so; now they'll get 20 cents on the dollar. It doesn't sound like much, but if the mortgages goes into foreclosure, they get nothing.
There's also a danger that Friday's plan could foster unrealistic expectations.
"Borrowers are calling today from the announcement, and it could be fall before you see some of this executable," cautioned Faith Schwartz, who runs Hope Now, a trade association that represents lenders and loan servicers. "The good news is there are a few more tools."
Much of what was announced Friday followed intense discussions with the mortgage finance community. Sean Dobson, the chief executive of Amherst Securities, was part of that discussion, and he praised the administration's willingness to listen.
"It's a fatal wound to the economy if they don't do something about it . . . Nothing yet has been done," Dobson said, suggesting a negative loop where the housing crisis hits the economy, which creates more job losses, which add more homes to the foreclosure rolls. "This is the first step we've seen to interrupt that feedback loop."
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