White House proposes new help for troubled mortgages. Too little, too late?

President Obama on Friday proposed to sweeten a deal from Washington to entice banks to modify payments, lower loan principal, and expand eligibility in order to help more of the 11 million American families sinking under their mortgages.

The proposed modifications would move the Home Affordable Mortgage Program's sunset date from the end of 2012 to the end of 2013, triple incentives for banks to participate by paying up to 63 cents on the dollar to forgive portions of borrowers' debt, and force banks to consider other debts, including medical bills, in their approval process.

Part of a series of housing relief measures expected as Obama kicks off his 2012 reelection campaign, the proposed expansion of HAMP has been described by some housing experts as too little, too late, especially given that the program has already fallen far short of its goal of helping 4 million homeowners sinking under debt.

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Moreover, Obama's gambit to include mortgage servicers Fannie Mae and Freddie Mac, which hold nearly half of all US mortgages and have received $150 billion in bailout cash since 2008, have raised concerns from their independent government regulator that forcing the lenders to forgive principal could cost taxpayers another $100 billion.

The regulator, Edward DeMarco, told Congress last week that he doubted potentially costly principal modification – in essence, using Treasury funds to pay down the principal of an individual's mortgage – would be more effective than loan forbearance, which means allowing homeowners to lower or postpone payments in order to catch up on their debt. Mr. DeMarco is currently reviewing Obama's proposal.

Housing and Urban Development secretary Shaun Donovan disagreed in a conference call with reporters. "It's not enough to increase access,” he said. “We also have to increase impact. We have to rebuild equity. Lowering payments isn't enough."

The issue of taxpayers bailing out fellow homeowners is a heated one. A 2009 rant by an MSNBC reporter about mortgage bailouts helped spark the conservative tea party movement.

“This is a hoot,” Thomas Lawler, an economist and former Fannie Mae executive, told Bloomberg News. “The government will pay Fannie and Freddie, who are effectively owned by the government, to reduce the principal on certain loans?”

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