US launches $75 bln mortgage plan to aid homeowners

WASHINGTON/NEW YORK, (Reuters) – The Obama  administration yesterday launched a $75 billion foreclosure  relief plan, as new data showed one in five U.S. homeowners  with mortgages owe more than their house is worth.

The mortgage plan, part of a $275 billion housing stimulus  program announced last month, enables struggling homeowners to  modify loans even if they are “under water.”

Homeowners with mortgages on about 8.3 million properties  were under water at the end of 2008 and the distress is likely  to grow as home values drop, First American CoreLogic said.

The eligibility guidelines for the mortgage modification  program unveiled by the U.S. Treasury aim to target relief to  people facing imminent hardship. Their release opens the door  for borrowers who are delinquent in their payments or at risk  of falling behind to begin pressing for altered terms.

The program, which offers cash incentives to loan servicers  to cut monthly payments, will only modify mortgages on  single-unit homes up to $729,750, with higher limits for  multiple-unit owner-occupied properties. It would only apply to  loans originated before Jan. 1.

Homeowners who stay current on modified loans will see  their principal reduced by up to $5,000 and lenders will get  additional incentives for extinguishing second-lien home equity  loans.

The Treasury also announced that lenders could begin  refinancing mortgages owned or guaranteed by Fannie Mae or  Freddie Mac on homes whose values have dropped.

Being under water, or having negative equity, has  previously ruled out refinancing. The Obama administration  program seeks to ease payments and prevent foreclosures for  struggling borrowers and allow standard refinancings for  stronger borrowers whose homes values have eroded.

The administration is also pushing for legislation that  would allow bankruptcy judges to alter loan terms. The U.S.  House of Representatives is expected to pass a bill on Thursday  that would allow these mortgage “cramdowns” and shield firms  that ease loan terms from investor lawsuits.

U.S. home prices have swooned by more than 26 percent since  peaking in mid-2006, according to Standard &  Poor’s/Case-Shiller indexes, and are widely expected to slide  further.

The perfect storm of fast-eroding home values just as  unemployment has climbed to a 16-1/2-year peak has propelled  foreclosures to all-time highs and thrust the U.S. housing  sector into its deepest downturn since the Great Depression.

“The Obama plan will provide some real relief for some  people who need it, but I’m only modestly optimistic that we’re  going to see a significant reduction in foreclosures,” said  Mark Vitner, senior economist with Wachovia Corp in Charlotte,  North Carolina.

He said restrictions on the program for loan amounts, owner  occupancy and financial hardship would limit its effectiveness  in key markets such as California, Nevada and Florida that have  a high percentage of investor-owned homes in trouble.

Requests for loans to buy homes and refinance mortgages  dropped for a second straight week as potential borrowers held  back in hope of even lower mortgage rates and help from the  Obama rescue program.

The Mortgage Bankers Association’s applications index slid  by nearly 13 percent to about half the level it had reached  earlier this year when loan rates hit a low 4.89 percent. The  average 30-year mortgage rate last week was 5.14 percent.

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