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Obama mortgage aid targets distressed homeowners

The White House will use $75 billion to subsidize the loan payments of distressed mortgage-holders.

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Bank, government share losses

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Under one part of the White House plan, banks will take the first step, reducing a homeowner’s monthly payment to 38 percent of the homeowner’s income. Then, the government will step in, providing a subsidy to get the monthly payment down to 31 percent of the homeowner’s income. This part of the plan is for subprime mortgages – those made to people with less-than-stellar credit.

In a fact sheet, the White House estimates that the savings for a family with $200,000 remaining on a 30-year, fixed-rate 6.5 percent mortgage would come to $2,300 annually, or about $191 a month.

As an added incentive for borrowers to keep current, the plan also will give such borrowers $1,000 a year for five years that goes toward reducing the principal balance of a loan.

The carrot for the mortgage owner or servicer is an upfront payment of $1,000 for each mortgage that is modified downward. And, if the modification is successful, the bank will get another $1,000 a year for up to three years.

Additional Treasury plan

The new housing plan follows the US Treasury’s announcement that it was working on a plan to buy underperforming loans from US financial institutions. Treasury Secretary Timothy Geithner is still hammering out the details of the plan. But the plan announced Wednesday could help that effort if it reduces the number of foreclosed properties, says Alan White, an expert on loan modifications and a professor at Valparaiso University School of Law in Valparaiso, Ind.

“These two plans are closely related,” he says.

Mr. White is generally positive about the new approach. “These are all fairly thoughtful carrots,” he says. “But it would not hurt to use the power of the US Treasury or the FDIC [Federal Deposit Insurance Corp.] to strongly encourage the servicers to participate.”

However, Mr. Taylor says his organization is disappointed. “It will provide some help for homeowners on the fringe if interest rates dropped,” he says. “But I think their estimate of the amount of folks who will be helped is optimistic.”

Will banks go along?

For example, Taylor is not certain the banks will volunteer for the program. “Are those incentives enough to lop off tens of thousands of dollars that a homeowner will owe the bank?” he asks. And, he adds, the program is only slated to run for five years, after which the loans may revert back to their original status. “It just pushes off the problem for five years,” he says.

Some other housing experts were hoping the Obama administration would require modifications of the
principal amount owed. “Say someone bought a house for $400,000, and it’s now worth $200,000. They are just walking away from the mortgage,” says Jack McCabe of McCabe Research & Consulting in Deerfield Beach, Fla. "There is no incentive to keep making payments on houses that are continuing to decline.”

The Obama plan hopes to address this problem by stabilizing home prices.