U.S. weighing new mortgage plan

CNNMoney
By Jeanne Sahadi

Sources say the government is considering an effort to modify home loans and back up lenders. The White House says talks are ongoing.

New York - The government is expected to announce soon that it will devote up to $50 billion to directly address the source of the financial crisis: bad mortgages and millions of homeowners at risk of foreclosure.

White House spokesman Tony Fratto said on Thursday that "no decisions" have been made on "a number of housing proposals" that the administration has been reviewing "for some time."

But three administration officials indicated to CNN that the new program would be designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments to affordable levels. In exchange the government would guarantee some percentage of each loan to backstop lenders if borrowers re-default on modified mortgages.

The plan could help up to 3 million homeowners, although that number is not firm, according to the administration sources.

If it comes to fruition, the government's new loan program could trump the efforts of the Hope for Homeowners program put into place on Oct. 1 by the Federal Housing Administration.

Lawmakers spent months fighting over the legislation that created the FHA program before enacting it in July. Lenders may be more likely to participate in the latest government plan if it imposes less stringent requirements.

The Hope for Homeowners program offers full government backing for lenders that agree to write down a mortgage to 90% of a home's appraised value. But the loss to lenders can be greater than 10% because many troubled homeowners are also "under water" because of falling home prices - meaning they owe more on their home than its current market value. So to participate in Hope for Homeowners, lenders in many cases would have to lock in a sizeable loss.

The plan being considered likely would not require such a strict writedown. Instead, it might require that the new payment for the borrower be affordable.

Monthly payments can be made affordable by, among other ways, reducing the interest rate for a period of time or extending the term of the loan. Typically one way to determine affordability is to consider a delinquent borrower's debt-to-income ratio. At IndyMac, which was taken over by the FDIC this summer, loans are being modified so that borrowers' new mortgage payment - including insurance and taxes - does not exceed 38% of their pre-tax income.

The new government plan could offer lenders a way to reduce their losses on troubled loans, according to Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm.

"Effectively, this is a cheaper alternative to the FHA rescue program that Congress enacted," Seiberg wrote in a note Thursday. "Lenders would have to modify the loan to make it affordable, but no one has discussed imposing the FHA rescue haircut requirement."

Big pool of bailout funds

Funding for the potential initiative would come from the $700 billion financial rescue package passed by lawmakers in early October. To date, most of the money from that package has been devoted to getting the credit markets going again.

Details of the plan are still being worked out between the Treasury, the White House and the FDIC, which is expected to run the new program under the leadership of FDIC Chairman Sheila Bair.

A year ago, Bair called for lenders to systematically modify troubled loans in order to prevent further deterioration in the housing market and the broader economy.

Howard Glaser, a mortgage consultant for Fannie Mae and Freddie Mac and former counselor to the Department of Housing and Urban Development during the Clinton administration, said the potential government plan may not be adequate.

"The Bush administration's reliance on a 'pretty please' approach to foreclosure relief - asking banks to undertake voluntary efforts to renegotiate troubled loans - has delayed recovery of the housing markets and raised the costs to the next president of addressing the crisis," Glaser said.

Last week, during a Senate Banking Committee hearing, Bair had said that the government and lenders are behind where they should be in terms of preventing avoidable foreclosures. And that while voluntary programs have been helpful, she said going forward "there needs to be a package of carrot-and-stick incentives."

On Thursday, the majority of Senate Democrats on the Banking Committee sent a letter to President Bush urging him to use the powers granted under the financial rescue package "decisively, aggressively, and swiftly to reduce foreclosures."

"The fact remains that the administration has not dedicated the time, attention or resources needed to address the cause of the crisis - the historic levels of foreclosure," the letter states.