Treasury has new mortgage incentives: official

Tape put up by demonstrators that reads 'Foreclosure Free Zone' is seen outside a foreclosed home in Elmont, New York, April 9, 2009.

WASHINGTON (Reuters) - The U.S. Treasury Department will on Tuesday tap a $50 billion housing rescue fund to pay off mortgage investors and reduce monthly payments for millions of borrowers, said a senior administration official.

Mortgage servicers that own a small stake in costly loans will receive a cash payment to either erase the debt or agree to accept a reduced return on their investment.

"It will be a shared effort with lenders, investors, borrowers and the government to ease or extinguish second-lien mortgage payments," a senior administration official told Reuters.

During the height of the housing boom, some borrowers were able to buy a home with no downpayment by adding a second lien, and many of those loans are now failing as the economy and housing market struggle.

Second liens typically carry a higher interest rate than primary mortgages but those second liens will have a lower rate under the modification plan, the officials said.

"The second lien holder, as is appropriate in the junior position, is taking more of a reduction in interest rate," one official said. "The interest rate will go at least as low as the interest rate on the first and it will (fall) much further to get there."

Tuesday's announcement will build on President Barack Obama's housing rescue plan announced in February that aims to reduce the cost of homeownership for up to 9 million borrowers straining to make their monthly payments.

RESCUE GETS A REVAMP

Officials will also announce new incentives for the Hope for Homeowners program conceived last summer to refinance hundreds of thousands of struggling borrowers.

In fact, the program has only aided a handful of homeowners and the Department of Housing and Urban Development will offer mortgage servicers thousands of dollars for each home loan that they successfully modify under that troubled program, the officials said.

The officials said that they will continue to remove other bureaucratic encumbrances and expand incentives where needed to steer more homeowners away from default.

Some analysts have faulted officials and lawmakers for leaving Hope for Homeowners hamstrung by the question of second liens as those investors have had a near veto power on modifications.

"It has taken policymakers a long time to realize that second liens are a showstopper," said Dwight Jaffe, a professor of housing finance at Berkeley University in California.

(By Patrick Rucker and David Lawder; Editing by Bernard Orr)