Obama's New Attack on the Foreclosure Crisis

The Obama administration unveiled modifications to the Making Home Affordable (MHA) plan on Friday that aims to provide unemployed and underwater homeowners with temporary mortgage relief or reduced payments to avoid foreclosure.

The revised plan comes just a little more than a year after the $75 billion MHA program was first enacted. Critics (and struggling homeowners) charge that the program has generally been a miserable failure and has done little to stem the onslaught of foreclosures. In the fourth quarter of 2009 alone, an additional 250,000 U.S. households became three months' delinquent on housing payments and joined the 1.6 million Americans who currently face foreclosure, according to a report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

And for those homeowners who have miraculously secured trial loan modifications over the last year, many are still in danger of losing their homes because of underwater second mortgages. Some borrowers have also complained that even though they were granted modifications, banks continued to charge them their previous mortgage rates.

Up to 4 Million Homeowners Could Get Help

Under the modified plan, homeowners may be eligible to secure new loans that are backed by the Federal Housing Administration. The funding for the revised plan will come from the $50 billion allocation for housing programs under the Troubled Asset Relief Program (TARP).

Among those who will be specifically targeted for assistance, according to The Wall Street Journal, are unemployed homeowners who didn't knowingly take on excessive debt but are now struggling and jobless as a result of the Great Recession. Specifically, the plan could allow unemployed homeowners to reduce their monthly payments or possibly even take three- to six-month break from payments altogether.

Generally, though, the Obama administration thinks the revised plan could offer assistance through 2012 for up to 3 million to 4 million homeowners. The president was also very clear that government relief won't be handed out indiscriminately. "Our housing initiatives must balance the need to help responsible homeowners struggling to stay in their homes with the recognition that we cannot and should not help everyone," Obama said in a prepared statement. "We can't stop every foreclosure."

Among the foreclosures that the government would like to prevent are mortgages for less than $729,750 that amount to more than 31% of the homeowners' income on homes where the owners experienced some sort of financial hardship.

Better Incentives and Closed Loopholes

While the existing program has drawn criticism for doing little to encourage lenders to slash principal on mortgages, the new plan would give banks additional government payments to forgive some principal on delinquent mortgages. If borrowers hope to permanently reduce their principal debt, they must stay current on their loans for more than three years. (Bank of America [BAC], incidentally, just announced it will reduce principal on underwater adjustable-rate mortgages.)

Another key difference between the existing program and the revised plan is that borrowers won't have to wait until they miss a few payments before they qualify for federal assistance. As it stands now, some underwater homeowners may find that it's advantageous just to blow off their payments so that they qualify for government aid. Under the new plan, homeowners who have stayed current with their payments may be eligible for an FHA-backed loan.

Also, while the existing program has done little to help homeowners who are delinquent on second mortgages, several banks -- including Citi (C), JPMorgan Chase (JPM), Wells Fargo (WFC) and Bank of America -- have all committed to participate in a second-lien government program called 2MP, which will allow homeowners to get modifications on second mortgages. The upshot is that with a second-mortgage relief program in place, it should become easier to slow down the foreclosure rate -- provided banks actually follow through with their commitment to modify those loans.

The revised plan, which aims to fill in the holes left open under the MHA program, bears only a little resemblance to the housing policy Obama proposed back in 2008, before the election. Under that plan, he called for a $30 billion stimulus program, $20 billion of which would go toward mortgage relief and $10 billion of which would be used to assist local governments facing tax revenue shortfalls as a result of the housing crisis.