WASHINGTON (AP) - The government's bold new plan to stem the foreclosure crisis aims to succeed where previous efforts have fallen flat. Yet just as before, the odds are long, and many struggling borrowers won't qualify.
In theory, the effort unveiled Friday would help millions of troubled homeowners who owe more on their mortgages than their homes are worth, or who are jobless and need a break on their payments.
But it depends on cooperation from investors and bankers, many of whom have been locked in disputes over whether to reduce the debt owed by homeowners.
And just like the bank bailouts, this rescue plan poses risks. If it doesn't slow the wave of foreclosures or if home prices nosedive, the tentative recovery in the housing market could fizzle.
The Obama administration says the plan will help stabilize the real estate market by keeping many borrowers out of foreclosure. If it succeeds, the plan would limit damage to the overall economy.
The new effort is designed to help two groups:
- Borrowers who owe more on their loans than their houses are worth. More than 15 million homeowners fall into this category, according to Moody's Analytics. About 10 million of them owe at least 20 percent more than their house's current value.
Their mortgage companies can cut the total amount they owe, or they can refinance into loans backed by the Federal Housing Administration. FHA will get $14 billion in incentive money from the federal bailout fund.
- Unemployed borrowers. People receiving unemployment benefits would have their mortgage payments cut to no more than 31 percent of their monthly income for three to six months.
That's intended to give homeowners more time to find a job. Once they do, they may qualify for a loan modification that would permanently reduce their payments under the administration's existing $75 billion loan modification program.
The plan aims to help 3 to 4 million borrowers avoid foreclosure - the same target the administration tried to reach with its original plan last year. Even with the changes, the effort will likely prevent no more than 1.5 million foreclosures, estimates Mark Zandi, chief economist at Moody's Analytics.
Disputes among banks and investors, who would have to approve any cuts in loan principal, could prevent the effort from stopping more foreclosures, as could another drop in home prices.
"Practically speaking, this is probably going to prevent foreclosures. But I don't think they're ever going to reach 3 to 4 million homeowners," said Chris Mayer, a real estate professor at New York's Columbia Business School. "These plans always turn out to be harder than we think."
The administration's existing program to prevent foreclosures hasn't made much of a dent in the foreclosure crisis. A lack of planning and shifting rules on who qualifies produced a huge backlog in the program, the special inspector general for the federal financial bailout fund told lawmakers this week.
Still, analysts said this effort has a better chance of success than past efforts because it would reduce principal for some struggling borrowers - a method more effective at helping homeowners than reducing interest payments or other forms of aid. Laurie Goodman, a widely followed mortgage securities analyst with Amherst Securities Group, called it "a huge step forward."
The plan comes after pressure from the administration's Democratic allies in Congress to intensify efforts to help Americans at risk of losing their homes.
The overhauled plan came together after several months of negotiations between the Treasury Department, major banks and investors in mortgage securities. A major sticking point so far has been getting everyone involved to agree on restructuring loans.
The problem is that most of the troubled mortgages aren't owned by the banks themselves. They were bundled into securities during the housing boom and sold to investors.
To reduce principal payments on those mortgages, banks often must get permission from the investors who hold the securities - and may not be willing to take less.
Banking industry officials were optimistic that investors would negotiate.
"You have two choices: Modify the mortgage and help a borrower stay in their home or possibly get nothing if they foreclose," said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, an industry group.
The plan risks angering Americans like Jim Truschel, a homeowner in La Mirada, Calif., who said he was disappointed the government is spending taxpayer money on another homeowner bailout effort.
"I feel very sorry for the people that are in these situations, but they have to be somewhat to blame themselves," said Truschel, a retiree. "They should have realized that they were getting into things that they weren't going to be able to pay for."
The administration says irresponsible borrowers will not benefit. The plan will not help investors, speculators or "Americans living in million-dollar homes or defaulters on vacation homes," an administration fact sheet said.
Diana Farrell, a White House economic adviser, acknowledged the plan won't prevent many of the expected 10 to 12 million foreclosures expected over the next three years. Doing so, she said, "wouldn't be fair, it would be too expensive and we probably wouldn't succeed in any case, because many people got into homes that they simply cannot afford."
Rep. Barney Frank, chairman of the House Financial Services Committee, praised the new steps, particularly giving jobless borrowers a break on their payments for three to six months.
"The whole economy is hurt by these foreclosures," Frank said.
For taxpayers, the government's plan carries some risk. Lenders will probably sell their most troubled loans to the FHA so they can be insured against default, said Mayer of Columbia Business School. Experts have warned that the FHA faces rising losses from foreclosures and might need a bailout.
"There's more risk to taxpayers," Mayer said. "There's a big incentive for lenders to give the government the worst of their loans, the ones they fear they won't get paid back on."
One "underwater" homeowner, Joe Clarke, a police officer in Oxnard, Calif., welcomed word of the plan. He owes $390,000 on his home, which is only worth about $250,000, and he fears his adjustable-rate loan will reset to a higher rate in August.
"I've made my payments," he said. "I didn't walk away from my house. I'm just not being afforded the opportunity to refinance my home, even at the current value, without taking the principal off."
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