U.S. housing chief aims to fix rescue flaws

By Patrick Rucker

SAN FRANCISCO (Reuters) - A housing rescue plan authorized by the U.S. Congress last summer was too narrowly tailored, but administrators will ease some rules so that it can save more troubled borrowers from foreclosure, the top U.S. housing policy official said on Tuesday.

At issue is the Hope for Homeowners program that was passed in July and gives the Department of Housing and Urban Development $300 billion to refinance failing home loans.

Lawmakers removed some red tape from that original plan early this month, which should make it more workable, HUD Secretary Steve Preston told Reuters in an interview on the edges of the Mortgage Bankers Association's annual meeting in San Francisco.

"It's a big change," Preston said in an interview at a mortgage lender conference in San Francisco. "I think as (the plan) was originally conceived, it was more limited and under the new legislation, it will broaden its relevance."

The changes were part of legislation passed early this month that gave the Treasury Department $700 billion to invest in banks and buy their sour investments.

Separate provisions of that bill give HUD greater power to settle disputes between different investors who might hold a stake in a single home loan.

"It allows us to make an upfront payment to the second lien holder to relinquish their obligation," Preston said of the new provisions.

REMOVING LENDER CONFLICTS

During the height of the housing boom, many buyers did not have to put any money down because lenders offered a second loan to cover as much as 20 percent of the home's value. When a home goes to foreclosure, disputes between the first and second lien holder can keep a borrower from getting aid.

Under the original legislation, the second lien holder would only recover some of his losses if the home soon increased in value. The new rules let HUD give the second lien holder a buyout to walk away from the loan.

"They were dealing with an uncertain economic event in the first one. In the second, they will deal with a certain economic event," Preston said of the change. "It will give them an opportunity to have a bird in the hand rather than something possible down the road."

Independent research by the nonpartisan Congressional Budget Office predicted that the original Hope for Homeowners plan would do little to ease the housing crisis in part because it did not resolve the conflicts involving the second lien holder.

Preston said that he and other HUD officials are looking to ease the program's regulations where they can.

The original legislation forced the lender to have a home reappraised and then write off 10 percent of that new value. The new rules give HUD flexibility to set the new loan level.

Preston said the government will have to measure the impact of the new provisions and get input from the mortgage industry, so implementing the changes will take time.

(Reporting by Patrick Rucker; Editing by Jan Paschal)