US to order lenders to cut mortgage payments for the jobless
Goal is to limit more foreclosures
WASHINGTON — The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said yesterday.
Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower’s income, which would typically be their unemployment insurance, for up to six months. In some cases, administration officials said, a lender could allow a borrower to make no payments at all.
The new push, which the White House is scheduled to announce today, takes direct aim at the major cause of the current wave of foreclosures: the spike in unemployment. While the initial mortgage crisis resulted from millions of risky home loans that went bad, more recent defaults reflect the country’s economic downturn and the inability of jobless borrowers to keep paying.
The administration’s newest push also seeks to more aggressively help borrowers who owe more on their mortgages than their properties are worth, by encouraging lenders to cut the loan balances of millions of these distressed homeowners and possibly refinance into loans backed by the Federal Housing Administration. The problem of so-called underwater borrowers has bedeviled earlier administration efforts to address the mortgage crisis as home prices plunged.
For the first time, the government will offer financial incentives to lenders that cut the principal these homeowners owe on primary mortgages.
The new initiatives are expected to take effect over the next six months and will be funded out of money remaining in the $700 billion bailout program for the financial sector, administration officials said.
The announcement comes as the administration faces increasing pressure from lawmakers and housing advocates to overhaul its foreclosure prevention efforts. So far, fewer than 200,000 borrowers have received permanent loan modifications under its $75 billion marquee program, known as Making Home Affordable. And the inspector general for the Troubled Assets Relief Program has raised concerns that many borrowers may re-default even after receiving relief under the program.
In the meantime, there is a growing backlog of distressed borrowers awaiting help from their lender and threatening to hamper efforts to stabilize the housing market. The “program will not be a long-term success if large amounts of borrowers simply re-default and end up facing foreclosure anyway,’’ the inspector general said in a report released this week.
The program features several other elements, including several steps to address the growing population of borrowers who owe significantly more than their home is worth. Underwater borrowers make up about a quarter of all households, according to First American CoreLogic. Economists consider these homeowners at higher risk of default because they cannot sell or refinance their home if they run into financial troubles.
For one, the government will for the first time provide financial incentives to lenders that cut the balance of a borrower’s mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if it this amount is 15 percent more than their home is worth.