Obama Rescue Plan Said to Be Limited to Homeowners Most in Need

The Obama administration intends to limit the loan-modification portion of its $75 billion mortgage rescue plan to homeowners who have lost jobs, suffered a pay cut or face higher mortgage payments, according to two people briefed on the program.

Treasury and housing officials, who announced the plan Feb. 18, are scheduled to release terms today. The program will lean heavily on government-seized finance companies Fannie Mae and Freddie Mac and require strict verification of financial hardship, said the people, who declined to be identified because details were still private.

President Barack Obama’s initial proposal, the biggest federal foray into real estate since the Great Depression, ignited criticism from Republican lawmakers that the government would be subsidizing homeowners financially capable of surviving the economic slump on their own. The plan is being refined to better assess homeowners in need, the people said.

“The industry is waiting to see the final plan,” said Faith Schwartz, executive director of the Hope Now Alliance, a group of mortgage lenders and servicers created at the behest of former Treasury Secretary Henry Paulson to increase loan modifications. “People want a uniform plan that is sustainable.”

Nicholas Strand, a mortgage-bond analyst in New York at Barclays Capital Inc., has said the limited details of the plan make it difficult to evaluate.

National Standard

The administration will outline a national standard for loan modifications as well as the program’s eligibility requirements and process for applying for aid, according to the Treasury’s Feb. 18 announcement and the people briefed on the plan. Borrowers who qualify may be able to lower their mortgage payments to as little as 31 percent of monthly gross income.

“You’re going to see a pretty good level of detail around safeguards and protections on eligibility and how we’re going to enforce those,” Treasury Secretary Timothy Geithner said during a hearing before the House Ways and Means Committee yesterday.

The Obama plan is divided into two main parts: helping about 4 million homeowners who are at risk of foreclosure to lower their monthly payments by modifying loan terms; and using Fannie and Freddie to refinance the loans of about 5 million Americans who owe more than their homes are worth.

The administration’s hardship requirements would apply only to borrowers seeking modifications, not refinancings.

Obama is seeking to help as many as 9 million Americans lower their mortgage payments to curb a jump in foreclosures. The U.S. housing market lost $3.3 trillion in value last year, and almost one in six owners with mortgages owed more than their homes were worth, according to a report last month by Zillow.com.

Record Foreclosures

A lack of credit and the record foreclosures are pushing property values even lower and keeping prospective buyers out of the market. Sales of previously owned homes, which account for about 90 percent of the housing market, fell in January to the lowest level since 1997, according to the National Association of Realtors. New-home purchases, which make up the rest, plunged to the lowest since the Commerce Department began keeping records in 1963.

For loan modifications, the Treasury will share the cost when lenders reduce monthly payments by forgiving a portion of the borrower’s mortgage balance, the government said.

Companies that service mortgages will get $1,000 for each modified loan, and as much as $1,000 annually for three years when the borrower stays current, the government said. Homeowners also are eligible for $1,000 annually for five years for remaining current, according to the plan. The cash will be applied to reducing the principal balance of the loan, according to a White House fact sheet.

Industry Payments

Mortgage servicers will get $500 and loan holders $1,500 to modify loans as an incentive for the industry to seek out borrowers at risk of falling behind on their payments.

The second part of the plan will have Fannie and Freddie refinance loans that the companies own or guarantee, without new appraisals. The government-run mortgage finance companies, seized by regulators in September, own or guarantee $5.2 trillion of the $12 trillion residential home loan market.

All institutions that receive future federal aid through the Treasury’s $700 billion Financial Stability Plan will be required to offer loan modifications.