U.S. Expands Housing Aid Program
New guidelines aim to help homeowners avoid foreclosure and sell homes for less than they are worth.
By Renae Merle
May 14, 2009
Banks could get incentive payments for allowing borrowers to sell their homes at a loss rather than go through foreclosure under new guidelines issued Thursday for the Obama administration's $75-billion housing plan.
The program, known as Making Home Affordable, focuses on paying lenders to modify distressed borrowers' loans so that payments are cheaper.
But under this expansion of the program, lenders can also receive incentive payments if the homeowner's loan is not modified.
In those cases, the lender could get as much as $1,000 for allowing a short sale, in which the lender accepts less than the value of the mortgage.
Under the plan, the government will now share the cost of extinguishing second liens on a property, such as those for second mortgages. If the short sale fails, the borrower can turn over the house keys in a process known as "deed in lieu of foreclosure," transferring ownership to the lender without a foreclosure.
At the end of the process, the homeowner could be eligible for $1,500 for relocation expenses.
"If a modification is not possible, we are also announcing steps to encourage the quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future," Treasury Secretary Timothy F. Geithner said. "These are critical steps in stemming the foreclosure crisis and stabilizing the housing market."
The additions to the program are an acknowledgment by government officials that not all distressed borrowers will be able to save their homes.
Despite government efforts, lenders are starting the foreclosure process on an increasing number of homes.
"We're not going to solve all problems, and this won't benefit all homeowners," Geithner said.
The program's expansion also includes a $10-billion feature that protects lenders from losses associated with falling home prices. If a lender modifies a loan and the homeowner defaults again, the lender faces more severe losses if home prices have fallen in the interim. The new incentive will encourage loan modifications in places where home values have dropped severely, according to a summary of the program.
It reduces "the risk of loss to lenders from modifications compared to alternatives that could result in the loss of homeownership," the summary said.
The Obama administration launched its foreclosure prevention plan in March, and more than 50,000 homeowners have been offered lower-cost mortgages. Lenders representing 75% of U.S. mortgages have agreed to participate, according to administration officials.
But the program has been implemented unevenly throughout the financial services industry, with some lenders lagging. And demand from distressed homeowners has overwhelmed many lenders and nonprofit organizations.
"The enhancements today will help more borrowers avoid some of the financial damage caused by foreclosure," said John Taylor, president of the National Community Reinvestment Coalition. "We're encouraged by the early numbers, but more work remains to be done to compel lenders to fully participate in the program."
