WASHINGTON – The Obama administration said Tuesday it is expanding its plan to stem the housing crisis by offering mortgage lenders incentives to lower borrowers' bills on second mortgages.
During the housing boom, lenders readily gave out "piggyback" second loans that allowed consumers to make small down payments or avoid them entirely. While home prices soared, such mortgages were even extended to borrowers with poor credit scores and people who didn't provide proof of their incomes or assets.
But those loans, which are attached to about half of all troubled mortgages, have been an obstacle to efforts to alleviate the housing crisis. That's because borrowers who are trying to get their primary mortgage modified at a lower monthly payment need the permission of the company holding the second mortgage.
The new plan aims to get rid of that roadblock, administration officials said. "We're offering even more opportunities for borrowers," Treasury Secretary Timothy Geithner said in a statement.
The new incentives are estimated to help up to 1.5 million borrowers with second mortgages, Housing Secretary Shaun Donovan said. While data on how many household have been helped by the Obama administration's housing plans are not available, Donovan told reporters there have been "hundreds of thousands of applications."
The administration's second mortgage initiative will be funded out of $50 billion in financial rescue money already allocated. As an incentive to modify second loans at lower interest rates, mortgage companies would get $500 upfront for each modified loan, plus $250 a year for three years as long as the borrower doesn't default.
Similarly, borrowers would get up to $1,000 over five years applied to the principal balance of their primary mortgage, and the government would pick up part of investors' costs as well. Lenders would also be given the ability to remove second mortgages entirely in exchange for larger government payouts.
The administration also plans to give mortgage companies $2,500 payments to entice them to participate in the "Hope for Homeowners" program. It was launched by the government last fall but has so far has been a failure, proving unattractive to banks required to absorb large losses.
It was supposed to allow 400,000 troubled homeowners to swap risky loans for traditional 30-year fixed-rate mortgages with lower rates. Instead only one loan has received final approval, with about 50 more in the works and fewer than 1,000 applications.
The program has been stymied by high fees, complex regulations and a requirement that banks absorb large losses. The Obama administration supports legislation in Congress to ease those restrictions.
Meanwhile, the faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm.
Meanwhile, another key piece of President Barack Obama's plan to keep borrowers from losing their homes is expected to be defeated this week in the Senate. There does not appear to be enough votes to pass a bill that would allow people to seek mortgage relief in bankruptcy court.
Many lawmakers remain worried that such legislation would unleash a torrent of loan defaults, ultimately driving up mortgage rates and introducing fresh uncertainty to a housing market in crisis.
There were, however, fresh signs Tuesday that the housing recession may be hitting bottom. Home prices have been setting record annual declines, but in February that 25-month cycle was broken.
The Standard & Poor's/Case-Shiller index of home prices in 20 major cities slid by 18.6 percent from February 2008, slightly better than the 19 percent in January. The 10-city index slid 18.8 percent, also a little better than the month before.
Prices in the 20-city index have plunged 30.7 percent from their peak in the summer of 2006, and the 10-city index has lost more than 31.6 percent.
AP Economics Writer Martin Crutsinger contributed to this report.