Housing agency loosens foreclosure aid rules

WASHINGTON (Reuters) - The U.S. Department of Housing and Urban Development will loosen terms of its foreclosure-prevention effort so that the program, meant to backstop $300 billion in home loans, can be more effective, the agency said on Wednesday.

The Hope for Homeowners program will now insure home loans that have had as little as 3.5 percent of their value erased by the original lender. Under the original terms, a lender would have to write off 10 percent of a failing loan before the government would invest.

Investors who hold a stake in failing loans through second liens may receive an up-front payment to waive their interest in the loan, HUD said. Some loans may be extended from their traditional 30-year length to 40 years.

"These changes will not perfect the Hope for Homeowners program, but they will improve it greatly," HUD Secretary Steve Preston told a luncheon at the National Press Club.

Congress created Hope for Homeowners in July and gave HUD a $300 billion fund to insure failing home loans. But the program was so wrapped in red tape that it fell flat.

"Because of strict guidelines and a number of unique and specialized requirements in the original law, few lenders have actually signed up and few borrowers have submitted applications," Preston said.

Only a few dozen loans were pushed through the program in October, its first month of operation, and policy-makers decided to create new incentives to get borrowers to make use of it.

(Reporting by Patrick Rucker; Editing by Dan Grebler)