Housing plan details which borrowers get help

John W. Schoen Senior producer • Profile • E-mail

The Obama administration’s plan to help head off millions of foreclosures came into clearer focus Wednesday when the government issued detailed guidelines governing which homeowners will qualify and how lenders will go about refinancing their mortgages.  But Treasury officials conceded it may not know for some time just how many of the estimated 9 million borrowers targeted by the $75 billion plan will be able to stay in their homes.

“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” Treasury Secretary Timothy Geithner said in a statement.

Since the housing market began to unwind nearly two years ago, the process of refinancing troubled loans has been mired in a legal thicket created by Wall Street packaging trillions of dollars worth of home mortgages, chopping them up into pieces and selling them to investors.

Mortgage servicers — originally hired to funnel payments from homeowners to investors — have been swamped by an avalanche of calls from borrowers trying to refinance loans, many of which were unsustainable from the day they were issued. Automatic rate increases and a rising wave of layoffs have put millions more homeowners at risk of default.

Under the plan, mortgage servicers will first apply a standard test to decide if investors would lose more money by foreclosing than they would by issuing a new loan with more affordable terms. Because servicers have been using a wide range of methods to make this calculation, a standard formula is expected to speed the approval of more affordable loans. The government is also hoping to speed the process by letting servicers use an automated system to value a home in place of individual appraisals.

The Treasury’s program, announced Feb. 18, aims to reduce monthly payments to no more than 31 percent of a borrower's gross monthly income. The plan is also designed to determine more quickly which borrowers can be helped — and which ones can’t.

"This is about doing the foreclosures that should be done,” said Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School of Business. “The foreclosure mitigation that's going to happen here, these modifications are in the interest of the banks.”

The plan pays loan servicers up to $4,500 for each loan they modify. Those who participate  have to follow a common set of guidelines.

Struggling homeowners also will have to leap several hurdles to be eligible to a new loan under the “Making Home Affordable” initiative. The program runs through 2012.

Borrowers are only allowed to have their loans modified once, and the program only applies to first-lien loans made Jan. 1, 2009, or earlier. Up to 4 million borrowers are expected to qualify.  Another 5 million borrowers who have mortgages held by government-controlled mortgage finance giants Fannie Mae and Freddie Mac should be eligible to refinance through June 2010.

Treasury officials said Wednesday they are still ironing out key details. One involves a major sticking point for many servicers who have tried to modify mortgages to more affordable terms: How to handle the millions of homeowners with second mortgages or home equity loans. Lenders or investors holding those second liens typically suffer the biggest losses when primary mortgages are modified, so winning their approval to modify loan terms has been difficult. The Treasury is working on a plan to let primary mortgage servicers compensate second lien holders, but those details have not been worked out.

The plan also offers no "safe harbor" provision to shield mortgage servicers from lawsuits by investors holding the securities backed by a loan being modified. By making the mortgage more affordable, those investors have to accept a lower return. Though standardized guidelines will clearly streamline a process that has overwhelmed many servicers, those who have declined to modify mortgages based on contract language may still face legal liability.

Treasury officials also said the program’s terms mean that it will be available only to "responsible" homeowners who didn’t buy more house than they could afford. But there was no strict test to determine that standard for eligibility.

The plan details announced Wednesday don’t include a key provision supported by the administration to allow bankruptcy judges more leeway to modify loan terms if servicers decline to do so. That change in the bankruptcy law requires Congressional approval.

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