Unemployed and 'underwater' to get mortgage relief

Under fire to do more to stop the foreclosure crisis, the Obama administration will announce Friday new steps to help the unemployed and those who are "underwater" with a bigger mortgage than their home is worth.

For some unemployed borrowers, the effort would require servicers to reduce or suspend monthly mortgage payments for up to six months, an administration official said. Also, the initiative calls for reducing the mortgage balances of some underwater homeowners to reflect current property values and refinancing them into Federal Housing Administration (FHA) loans. Loan servicers, who have been reluctant to cut mortgage principals, would receive incentives to do so.

"These program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own," an administration official said.

The plan would be paid for with funds from the Troubled Asset Relief Program, known as TARP.

The expansion of President Obama's signature $75 billion loan modification effort comes on the heels of two blistering government watchdog reports, which slammed the administration for poor implementation of the program, and raised doubts that it would reach the initial goal of helping 3 to 4 million troubled borrowers stay in their homes.

The program, which calls for reducing borrowers' monthly payments to 31% of their pre-tax income, has led to only about 170,000 long-term modifications so far.

The low figure has prompted consumer advocates and industry experts to call the program -- which focuses on adjusting interest rates and loan terms to bring monthly payments to affordable levels -- a failure.

Meanwhile, the nation is sinking deeper into the mortgage crisis. The share of seriously delinquent loans in the fourth quarter jumped 21% over the previous quarter, regulators said Thursday.

Lawmakers Thursday ripped into the administration, saying it had done little to stop the foreclosure avalanche because it was not addressing the current sources of defaults: unemployment and property value declines.

"Over three years after I've held my first hearing about foreclosure, we really haven't seen any bold, new initiatives coming out of Treasury to address the underlying problem of underwater mortgages," said Rep. Dennis Kucinich, D-Ohio, at the congressional hearing. "What are we doing to help those people who owe more on their homes than the home is worth?"

Nearly 25% underwater

Nearly one in four borrowers in America are underwater, according to First American CoreLogic. Many experts have said the only way to stem the foreclosure tide is to reduce the loan balances of these borrowers, who are more likely to walk away.

"The solution to this must be a principal write-down program," said John Taylor, head of the National Community Reinvestment Coalition, who testified Thursday. "That's what's going to put people in a position -- those who are still working -- to be able to continue to pay on their mortgage."

While banks have steadfastly avoided reducing mortgage principal, Bank of America has taken the first tentative step to cutting balances. It announced Wednesday it would lower the mortgage principal of a limited number of borrowers if they remained current for five years.

The new Obama administration initiative follows a smaller effort announced last month that would provide $1.5 billion to housing finance agencies in five states to develop programs to assist the unemployed and underwater.

Reducing loan balances, however, is very controversial. Some experts fear the benefit will go to those who don't truly need or deserve it, the so-called "moral hazard" argument. And it's likely to anger those who continue to make timely mortgage payments every month.

"In this effort to examine the principal reduction problem, we've been mindful, first of all, of the potential cost of such a program; secondly, of the fairness of doing principal reduction for some people; and thirdly, of the moral hazard issue," Assistant Treasury Secretary Herbert Allison told lawmakers Thursday.
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Written by Tami Luhby CNNMoney.com