Foreclosure fix: Obama's options

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NEW YORK (CNNMoney.com) -- This much we know -- the Obama administration wants to set aside between $50 billion and $100 billion to address the foreclosure crisis.

But how exactly officials plan to address this bear of a problem remains to be seen.

Treasury Secretary Timothy Geithner is expected to lay out plans for the $350 billion remaining in the financial industry bailout package on Tuesday.

Geithner was originally scheduled to unveil the program Monday, but the Treasury Department announced Sunday that it was pushing back the plan by a day to allow Geithner and others in the Obama administration to focus on getting the stimulus bill passed in Congress.

It is unclear if Geithner will unveil a specific plan for tackling foreclosures Tuesday. But the administration has said for weeks that it will devote more resources to helping homeowners than its predecessor.

"We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners," wrote Larry Summers, director of Obama's National Economic Council, to congressional leaders last month.

Finding a foreclosure fix is daunting, experts said. It eluded the Bush administration, which preferred to try to entice mortgage services to voluntarily modify loans without committing government funds.

Obama faces similar hurdles.

"It's been a real challenge," said Scott Talbott, senior vice president for government affairs for the Financial Services Roundtable. "To come up with a widespread approach is very difficult."

Obama's plan may expand on the Federal Deposit Insurance Corp.'s streamlined loan modification program, which serves as a model for workouts being conducted by several banks and by Fannie Mae and Freddie Mac.

The FDIC's program, which is underway at failed lender IndyMac, calls for making monthly payments more affordable by reducing interest rates, lengthening loan terms or deferring principal. Servicers aim to reduce payments to no more than 31% of a borrower's monthly income. So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers.

Summers has said that banks that receive bailout funds will be required to implement foreclosure prevention programs.

The Obama administration is expected to put some money behind the modification efforts. It's likely any modification plan will come with incentives for servicers and with some type of backstop in case the borrower defaults again. FDIC Chairman Sheila Bair unveiled a $24.4 billion plan in November that offered servicers $1,000 and provided a guarantee to cover 50% of any losses in case of redefault. The proposal, which she estimates will help 1.5 million people avoid foreclosure, has gone nowhere so far.

Congressional lawmakers would require the president to develop a loan modification plan under the stimulus bill currently under debate in the Senate.

"Stemming the tide of foreclosures, which are at the heart of this economic crisis, must be one of our top priorities," said Senator Chris Dodd, D-CT, in a statement late Friday night after the Senate approved his amendment to the stimulus plan that would require the Treasury Department to spend at least $50 billion in funds from the bank bailout on a loan modification program.

"By providing the Treasury with the authority and funds to design and implement a loan modification program, we can help nearly 2 million families nationwide...avoid losing their home," Dodd added.

A major problem confronting the Obama administration, however, is what to do with the rising number of foreclosures stemming from unemployment. Loan modifications don't work for these borrowers.

The only viable solution for these delinquent homeowners is to get the economy moving again so they can get jobs, experts said.

Along those lines, Shaun Donovan, the Secretary of the Department of Housing and Urban Development, said in an interview on CNN Saturday morning that creating jobs was the top way to address the foreclosure problem.

"What is really driving the foreclosure crisis right now is that people are losing their jobs. And so job number one is to pass a recovery bill that will add three to four million jobs in this country," Donovan said.

To be sure, the administration's efforts will go beyond the bailout package. Already, it's likely the massive stimulus package will contain measures to spur homebuying, including a $15,000 tax credit for those purchasing a home. On deck is controversial legislation to allow bankruptcy judges to modify loans on primary residences.

Congressional Democrats are also looking to revamp the troubled Hope for Homeowners program, which was designed to refinance struggling borrowers into government-backed Federal Housing Administration loans. Few borrowers have signed up for the program, in part because of its high fees. Lawmakers hope to make it more attractive by easing the terms and providing incentives for servicers to participate.

In his statement late Friday, Dodd said his amendment would reform the program by reducing the upfront and annual premiums for borrowers, lowering the percentage of future equity that homeowners must share with the government and adding incentive payments to servicers.

Whatever the administration chooses to do, it should implement it quickly, experts said. Foreclosures continue to rise, with a new one started every 13 seconds, according to the Center for Responsible Lending.

"Every minute they delay someone is going to lose their home," said Kathleen Day, the center's spokeswoman. "The government has waited too long to act."

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