With the country's foreclosure crisis worsening, the Obama administration today announced sweeping changes to their embattled $75 billion mortgage modification program in an effort to help people struggling keep their homes.
The changes come amid increasing criticism of the program by Democrats, Republicans and non-partisan government watchdogs.
The administration wants to help two groups of borrowers at risk of losing their homes: the unemployed and the underwater -- who owe more on their mortgage than their home is worth. The new effort is expected to cost about $14 billion, but no new taxpayer dollars will be needed.
Now lenders can reduce the payments for unemployed homeowners for a minimum of three months and a maximum of six months while the borrower looks for work. To qualify for the reduced payments, the homeowners must be eligible for the administration's Home Affordable Modification Program and be receiving unemployment benefits.
The banks would charge no more than 30 percent of the homeowner's unemployment benefits. At the end of that period, the homeowners would then have to make up their payments by extending their loan balance.
The effort to help unemployed borrowers is an attempt to deal with the second wave of the foreclosure crisis. The first wave was primarily subprime borrowers, people who received loans that they were always going to struggle to afford. But with the nation's unemployment rate currently at 9.7 percent, the second wave has been people who lost their jobs during the recession.
Underwater homeowners will also receive help from the White House. As housing prices have plummeted, millions of homeowners have ended up underwater, owing more than the value of their homes. Under the new plan, lenders would reduce a homeowner's mortgage balance by at least 10 percent to get within 15 percent of the new real value of their home, refinancing into loans backed by the government's Federal Housing Administration in an effort to make the loans more affordable.
The lower mortgage amount would help the homeowner stay current with payments and avoid foreclosure,, while the banks would avoid the costly process of foreclosures.
The housing market, too, would benefit, since foreclosures can destabilize an already battered market. Around 2.8 million homeowners received foreclosure filings last year and some estimates predict that this year's numbers could be even higher.
An administration official emphasized that the changes would provide help for all the key players in the housing market.
"These improvements provide servicers and lenders with refined tools for helping homeowners who are unemployed and underwater," said Treasury Assistant Secretary Michael Barr.
Barr said the changes would help the administration fulfill their goal of helping millions of struggling homeowners avoid foreclosure.
Treasury's bailout boss Herb Allison outlined the new changes at the White House on Friday morning.
When the administration rolled out the Home Affordable Modification Program over a year ago, President Obama vowed that it would help three to four million homeowners. To date the program has only helped 168,000 homeowners obtain permanent mortgage modifications. However, the administration has said that the number of homeowners offered trial modifications – 1.3 million – counts as homeowners receiving help.
Earlier this week bailout watchdog Neil Barofsky blasted that statistic as "essentially meaningless."
"Defining success by how many offers are given can reasonably be received as essentially meaningless," Barofsky said in an audit delivered to Congress. "It is simply not a useful measure."
At a House Oversight Committee hearing Thursday, both Democrats and Republicans criticized the program.
Rep. Jim Jordan, a Republican from Ohio, called the program "a total mess."
"The problem of foreclosures has not been solved," Jordan said, "and in many ways it's worse than ever."
Rep. Elijah Cummings, a Democrat from Maryland, stated, "The question is not whether we will get through the storm. The question is, who will be living in your house after the storm is over?"
As part of the new changes, lenders will now also receive twice as much money in federal incentives to modify second mortgages, including piggyback mortgages.
The new plans will go into effect over the next six months. The money for the plans will be drawn from the $700 billion Troubled Asset Relief Program, so no new funds will be required.