The new foreclosure prevention plan announced today will require the mortgage companies participating in the Obama Administration's existing foreclosure prevention program to consider slashing the amount borrowers owe.
The new effort is designed to help two groups:
1. Borrowers who owe more on their loans than their houses are worth.
Nearly 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.
These people would be helped in either of two ways: Their mortgage companies can cut the total amount they owe on their mortgage. Or they can refinance into loans backed by the Federal Housing Administration, which insures loans against default. The FHA will get $14 billion in incentive money from the federal bailout fund.
2. Unemployed borrowers.
People receiving unemployment benefits would see their mortgage payments drop to no more than 31 percent of their monthly income -- but only 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.
It also includes three to six months of temporary aid for borrowers who have lost their jobs. And there will be additional payments to give banks an incentive to reduce payments or eliminate second mortgages such as home equity loans.
The plan will also allow lenders to refinance mortgages that are under water with a new loan backed by the FHA. Lenders will have to reduce the first mortgage by at least 10 percent. And the total mortgage debt cannot exceed 115 percent of the current value of the home.
The current HAMP program to prevent foreclosures has failed to make a dent in the problem. Only 170,000 homeowners have completed loan modifications out of 1.1 million who began the program over the past year.
Administration officials played down any notion that the new plan would solve the foreclosure epidemic. About 6 million homeowners have missed at least two months of payments.
Diana Farrell, a White House economic adviser, said the plan won't prevent most of the 10 million 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."
The administration also stressed that the plan won't aid investors, speculators or "Americans living in million-dollar homes or defaulters on vacation homes."
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