Unemployed and 'underwater' to get mortgage relief

By Tami Luhby, senior writer


NEW YORK (CNNMoney.com) -- Under fire to do more to stop the foreclosure crisis, the Obama administration will announce Friday new steps to help the unemployed and those who are "underwater" with a bigger mortgage than their home is worth.

For some unemployed borrowers, the effort would require servicers to reduce or suspend monthly mortgage payments for up to six months, an administration official said.

Also, the initiative calls for reducing the mortgage balances of some underwater homeowners to reflect current property values and refinancing them into Federal Housing Administration (FHA) loans. Loan servicers, who have been reluctant to cut mortgage principals, would receive incentives to do so.

"These program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own," an administration official said.

The plan would be paid for with funds from the Troubled Asset Relief Program, known as TARP.

The expansion of President Obama's signature $75 billion loan modification effort comes on the heels of two blistering government watchdog reports, which slammed the administration for poor implementation of the program, and raised doubts that it would reach the initial goal of helping 3 to 4 million troubled borrowers stay in their homes.

The program, which calls for reducing borrowers' monthly payments to 31% of their pre-tax income, has led to only about 170,000 long-term modifications so far.

The low figure has prompted consumer advocates and industry experts to call the program -- which focuses on adjusting interest rates and loan terms to bring monthly payments to affordable levels -- a failure.

Meanwhile, the nation is sinking deeper into the mortgage crisis. The share of seriously delinquent loans in the fourth quarter jumped 21% over the previous quarter, regulators said Thursday.

Lawmakers Thursday ripped into the administration, saying it had done little to stop the foreclosure avalanche because it was not addressing the current sources of defaults: unemployment and property value declines.

"Over three years after I've held my first hearing about foreclosure, we really haven't seen any bold, new initiatives coming out of Treasury to address the underlying problem of underwater mortgages," said Rep. Dennis Kucinich, D-Ohio, at the congressional hearing. "What are we doing to help those people who owe more on their homes than the home is worth?"

Nearly 25% underwater

Nearly one in four borrowers in America are underwater, according to First American CoreLogic. Many experts have said the only way to stem the foreclosure tide is to reduce the loan balances of these borrowers, who are more likely to walk away.

"The solution to this must be a principal write-down program," said John Taylor, head of the National Community Reinvestment Coalition, who testified Thursday. "That's what's going to put people in a position -- those who are still working -- to be able to continue to pay on their mortgage."

While banks have steadfastly avoided reducing mortgage principal, Bank of America has taken the first tentative step to cutting balances. It announced Wednesday it would lower the mortgage principal of a limited number of borrowers if they remained current for five years.

The new Obama administration initiative follows a smaller effort announced last month that would provide $1.5 billion to housing finance agencies in five states to develop programs to assist the unemployed and underwater.

Reducing loan balances, however, is very controversial. Some experts fear the benefit will go to those who don't truly need or deserve it, the so-called "moral hazard" argument. And it's likely to anger those who continue to make timely mortgage payments every month.

"In this effort to examine the principal reduction problem, we've been mindful, first of all, of the potential cost of such a program; secondly, of the fairness of doing principal reduction for some people; and thirdly, of the moral hazard issue," Assistant Treasury Secretary Herbert Allison told lawmakers Thursday.  To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Sponsors

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.