The Obama administration Wednesday unveiled key details of its
housing market rescue plan that should enable mortgage servicers to
start immediately cutting monthly payments for eligible
borrowers.
The administration says the plan, which relies on $75 billion in
incentives for borrowers, mortgage servicers and investors, will
help right the housing market by providing more affordable loans
for "responsible" homeowners at risk of foreclosure.
"There are going to be some people who don't qualify. There are
going to be some people who qualify but don't succeed," a White
House official said during a background briefing with reporters on
the plan.
The Treasury Department on Wednesday confirmed many key features
of the loan-modification program and released technical documents
detailing how the loan modifications would work. The administration
expects the program to reach up to 3 million to 4 million
homeowners at risk of foreclosure. Under a separate program, the
administration aims to help as many as 4 million to 5 million
borrowers who have seen their home values plunge take advantage of
current low mortgage rates by refinancing.
The administration will also soon unveil the details of a new
optional program for mortgage servicers to offer partial payments
to holders of second mortgages to extinguish the second liens, the
White House official said.
The loan-modification plan is the most ambitious proposal yet to
help stem the foreclosure crisis. Under the program, the government
would pay mortgage servicers a $1,000 one-time fee to reduce
borrowers' payments to 38% of their income for five years. The
government would then match the cost of further interest-rate
reductions or other measures intended to bring mortgage payments
down to 31% of borrowers' income.
Interest rates can be reduced to as low as 2% under the program.
After five years, mortgage servicers can begin to raise the rate,
but only as high as the market rate prevailing at the time the loan
was modified. "There's long-term affordability built into the
plan," the White House official said.
The government would pay servicers up to $1,000 a year for up to
three years if borrowers stay in the program. Meanwhile, borrowers
would receive up to $1,000 annually for five years for staying
current on the loan. In addition, the government would pay $1,500
to mortgage investors and $500 to servicers for modifying loans
under the program guidelines that isn't delinquent.
The payments to servicers, investors and borrowers will kick in
only after a loan modification survives a 90-day trial period,
during which all foreclosure actions would be suspended
temporarily, the Treasury said Wednesday.
The administration was largely silent on potential investor
lawsuits against servicers that perform modifications, perhaps the
biggest impediment to the program's success. Legislation to give
mortgage servicers a safe harbor against such litigation is pending
in the U.S. House. A White House official said the
loan-modification program wouldn't override contracts with
investors.
Though the program relies on incentives, it won't be voluntary
for all mortgage servicers. In a joint statement, the Federal
Reserve and other regulators said that financial firms that receive
government funds in the future under the administration's
bank-rescue program will be required to participate in the
program.
In addition, the program will be an all-or-nothing proposition
for participating mortgage servicers, who will be required to
modify all eligible loans in their portfolios according to the
program guidelines. The requirement is intended to ensure that
servicers, lured by the incentives, don't dump just "the
low-hanging fruit" into the program, a senior Treasury official
said.
Still, mortgage servicers won't have to modify loans under the
program where it is "explicitly prohibited by contract," according
to a program document. Servicers are required to use "reasonable
efforts to obtain waivers of limits on participation," the document
said.
Borrowers must meet several eligibility requirements. The
program will apply only to owner-occupied primary residences. Only
first mortgages with an unpaid principal balance of up to $729,750
for a single-family home will qualify for modification. Mortgages
must be originated on or before Jan. 1, 2009, to qualify for the
program, which will accept eligible borrowers through the end of
2012.
In addition, borrowers must be screened for financial hardship.
They will have to provide a written statement saying they don't
have enough liquid assets to meet their mortgage payments.
Borrowers wouldn't be required to liquidate retirement accounts to
be eligible for the program, the White House official said.
Lenders will have to document current income, assets and
expenses to verify that borrowers are struggling to meet their
mortgage payments.
For borrowers deemed at risk of imminent default, lenders will
apply a net present value test to determine whether the loan is
worth modifying under the program. According to details of the test
released by Treasury, mortgage servicers will have significant
leeway in the assumptions they use for the test, including the
discount rate. However, the rate will be capped at the Freddie Mac
Primary Mortgage Market survey rate plus a spread of 2.5%.
In cases where loans fail the net present value test, mortgage
insurers have agreed to pay partial claims in order to help the
borrower avoid foreclosure, the Treasury said.
The plan's payments to borrowers have been criticized as
unnecessary windfalls to homeowners who have seen their monthly
payments cut. The payments are "designed as an extra incentive to
have all the incentives, all the psychological help they need, to
make the next payment," said a White House official, who noted they
would go directly to reducing the outstanding principal balance on
the loan.
Administration officials said details would be forthcoming on
the plan to help extinguish second liens on homes. "We think we can
develop a streamlined additional program that will help reduce debt
overhang," a White House official said.
Treasury added that Freddie Mac (FRE) will audit compliance for
the housing program.
-By Maya Jackson Randall and Jessica Holzer, Dow Jones
Newswires; 202-862-9255; maya.jackson-randall@dowjones.com