Obama Housing Plan to Cut Mortgage Payments, Stem Foreclosures

By Margaret Chadbourn and Rebecca Christie

Feb. 18 (Bloomberg) -- U.S. President Barack Obama will today outline an estimated $50 billion plan to stem a surge in home foreclosures that will subsidize cuts in mortgage payments for millions of struggling borrowers.

Obama intends to make loan modifications the centerpiece of plan that also gives bankruptcy judges more power to help borrowers keep their homes, said people familiar with the matter. Obama, in Phoenix on the second stop of a two-day swing through the U.S. West, will announce details at 10:15 a.m. local time as he campaigns for his economic recovery package, deputy White House spokesman Jen Psaki said.

“We must stem the spread of foreclosures and falling home values for all Americans and do everything we can to help responsible homeowners stay in their homes,” Obama said yesterday in Denver, where he signed legislation providing $787 billion in spending and tax cuts intended to revive the economy.

Record foreclosures in the past year are swelling the glut of properties on the U.S. market, forcing down home values and undermining homebuilders’ efforts to revive demand and lighten inventory by cutting prices. The housing market lost an estimated $3.3 trillion in value last year and almost one in six owners owed more than their homes were worth, online data provider Zillow.com said Feb. 3. The U.S. economy shrank 3.8 percent in the fourth quarter, the most since 1982.

The administration on Feb. 10 presented an overhaul of a $700 billion financial rescue plan, passed last year under former President George W. Bush, to shore up bank balance sheets and revive lending to businesses and consumers. The Treasury Department will use the remaining funds, at least $50 billion, on the housing relief plan to prevent millions of foreclosures, said a Democratic official briefed on the plan.

Banks Suspend Foreclosures

Banks including Citigroup Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc. and Bank of America Corp. have agreed, at the request of lawmakers, to suspend foreclosure proceedings until the Obama plan is adopted. The Office of Thrift Supervision last week urged the lenders it oversees to suspend foreclosures.

The new housing program will set a common standard for mortgage modifications, and will operate along with programs started last year including Hope Now and Hope for Homeowners, a person familiar with the plan said. Obama’s plan will be voluntary for lenders and investors, the person said, and borrowers wouldn’t have to be in default to qualify, a condition in previous plans, according to people briefed on the plan.

The government will subsidize interest-rate reductions by working with the companies that handle mortgages, known as servicers. The proposal will provide incentives for those companies to cut the monthly payments for households without shortchanging investors, said one person familiar with the plan.

Servicers

The plan will probably compensate servicers, or the investors holding the loans, if they reduce the payments to about 31 percent of the borrower’s pretax income, said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. He said 31 percent would be a “good target” for using government assistance.

The administration wants banks to offer loans with easier terms to borrowers in danger of defaulting on their mortgages. The aim is to reduce monthly mortgage payments for beleaguered homeowners, rather than principal owed on the property, Obama’s top economic adviser said.

“Going directly at the problem means addressing affordability by addressing payments,” National Economic Council Director Lawrence Summers said Feb. 13, on Bloomberg Television’s “Political Capital with Al Hunt.”

Bankruptcy Help

Loan modifications will be combined with a push for more authority from Congress, including a proposal that would let bankruptcy court judges cut loan rate for borrowers, the person said. The Obama administration also wants to permit modifications on Federal Housing Administration and Veterans Administration loans, which currently can’t be changed.

Community groups support efforts to let judges cut mortgage rates for borrowers in bankruptcy, a provision that the banking industry opposes. Investors have said this provision could cripple the secondary mortgage market and raise interest rates for all borrowers.

During all of last year, more than 2.3 million homeowners faced foreclosure proceedings, an 81 percent increase from 2007, and analysts say that number may soar to as much as 10 million in the coming years.

Treasury Secretary Timothy Geithner and Housing Secretary Shaun Donovan courted banks and housing industry groups last week to gather support ahead of the housing policy announcement. The Cabinet officers used a one-hour meeting to discuss strategies for preventing foreclosures and modifying mortgages for struggling homeowners.

Bank of America, JPMorgan, Wells Fargo & Co. and Citigroup were represented at the meeting with Geithner and Donovan, along with Fannie Mae and Freddie Mac, the government-backed mortgage companies, and banking industry and consumer advocacy groups, the people said. The attendees offered ideas to help homeowners survive the recession.

To contact the reporters on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net.