Treasury to start framing foreclosure fix

Administration officials to unveil plan to address housing crisis. But details may be lacking.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Treasury Secretary Tim Geithner is expected Tuesday to start laying out the Obama administration's long-awaited plans to address the foreclosure crisis.

But how much detail he'll reveal remains to be seen.

This much we know -- the Obama administration wants to set aside between $50 billion and $100 billion to address the foreclosure crisis. Loan modifications are expected to be a central part of the plan.

The administration's plan to attack the foreclosure crisis should come as part of its proposal for using the $350 billion remaining in the financial industry bailout package. Obama's officials have said for weeks that they will devote more resources to helping homeowners than their predecessor.

Washington insiders, however, say that Geithner may merely announce an overall framework for foreclosures, but won't get into specifics. Housing and Urban Development Secretary Shaun Donovan told CNN Saturday that the plan's details would be unveiled "in coming weeks."

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."

Potential plans

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.

Larry Summers, director of Obama's National Economic Council, 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.

Officials may also expand the role of Fannie Mae and Freddie Mac, which the federal government took over in September. Two months later, the mortgage finance companies announced a plan to help delinquent borrowers by reworking their mortgages.

The Bush administration had hoped the agencies' efforts would set a national standard for loan modifications. But the plan, which reduces payments to no more than 38% of a borrower's monthly income, is viewed as falling short because most of the troubled loans fall outside the purview of Fannie and Freddie.

Under the stimulus plan current under debate in the Senate, congressional lawmakers would require the president to develop a loan modification plan.

"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-Conn., 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.

Beyond bailout

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." To top of page

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