By Rebecca Christie and Kate Andersen Brower
March 26 (Bloomberg) -- The Obama administration plans to announce programs to help homeowners avoid foreclosure, including subsidies for borrowers who owe more than their home is worth.
The plan, to be unveiled today, would expand Treasury Department and Federal Housing Administration programs and use funds from the $700 billion Troubled Asset Relief Program, according to two administration officials. The administration faced a week of criticism from lawmakers and watchdog groups who say the government hasn’t helped enough homeowners stave off foreclosure.
“It’s almost like a triage policy,” said Eric Barden, chief investment officer of Barden Capital Management in Austin, Texas. “It limits the losses of the most overvalued properties and it also limits the losses to the borrowers that are in the most distress.”
Foreclosures are expected to climb to 4.5 million this year from 2.8 million in 2009, according to RealtyTrac Inc., an Irvine, California-based research firm. The administration of President Barack Obama and banks including Wells Fargo & Co. and Bank of America Corp. have so far fallen short of meeting goals of the government’s foreclosure-prevention program, according to a report by Neil Barofsky, the TARP special inspector general.
The new plan would increase payments to lenders that modify second mortgages, an official said. Banks’ unwillingness to write down second liens has helped block efforts to prevent foreclosures, said Josh Rosner, managing director at Graham, Fisher & Co. The Washington Post reported earlier on the administration’s plan.
The administration will propose allowing more mortgages to be refinanced into FHA guarantee programs if the borrower is current on the loan, one of the officials said. The lender would have to cut the amount owed by at least 10 percent to less than the value of the home. The first and second mortgages combined would have to be no more than 115 percent of the home’s value.
“Banks continue to carry second liens on their books at vastly inflated value,” Rosner said. “If the government reduced their ability to overinflate these assets, the banks would be more willing to engage in principal reductions.”
The Treasury would help unemployed homeowners reduce mortgage payments for at least three months while they look for work, the officials said. If homeowners don’t find a job in that time, or if they find a new job at a lower salary, they will be evaluated for further assistance.
Critics, including consumer groups and Republican lawmakers, said the administration hasn’t yet done enough.
“As long as the administration continues to sidestep the larger issues such as job creation and how they intend to deal with Fannie and Freddie, subsequent misadventures into the mortgage market will continue to be an exercise in futility,” Representative Darrell Issa of California said yesterday in a statement.
Earlier this week, the administration said it wasn’t yet ready to restructure Fannie Mae and Freddie Mac, the government- backed mortgage companies that have been in conservatorship since 2008.
Existing incentives will be expanded for borrowers with FHA-guaranteed loans, and relocation assistance payments will be doubled for borrowers who have to move out of residences. Servicers will be required to consider principal writedowns when modifying loans and the Treasury will offer incentives for principal reductions.
“We continue to support the government’s efforts to prevent foreclosures,” said Kevin Waetke, a spokesman for Wells Fargo, the biggest U.S. mortgage lender. “The federal programs, coupled with our own, are helping struggling American homeowners to reach more affordable mortgage payments and to remain in their homes. We will review the details of the programs as soon as we receive them and will work to implement them by this fall.”